It’s natural that you would place a higher value on your business than a buyer would. You probably invested years into building your business, and you no doubt have some strong emotional ties to it.
But buyers just want to know if buying your business is a good investment. It’s rare for them to have any kind of emotional attachment and that will affect how they value the business.
To get a clearer idea of how a buyer sees your business, imagine you are the buyer. Would you be willing to buy a business with an ROI of only 5%? Doubtful. Yet many business owners fail to understand that concept when selling their businesses.
If you put yourself in the buyer’s shoes when determining what your business is worth, there’s a greater chance for a successful deal.
What’s Your Business Really Worth?
In nearly 150 business sales, our valuation methodology has been tested and proven to be a good predictor of value. However, a business is only worth what a buyer is willing to pay for it—the market value—and no one can predict with absolute certainty how a given buyer will see your business.
Tax on The Sale of a Business
Whether you’re selling now or just planning your succession, we strongly advise you to speak with a tax expert, either yours or ours. Tax planning is usually more important than many business owners appreciate. Consulting a tax expert can be worth thousands of dollars in your pocket.
After all, it’s not how much your business sells for, but how much you actually get to keep that’s important.
Business Value Misconceptions
Everyone seems to have an opinion about business value. The problem is that many of them are not expert opinions, but simply rumours or guesses.
These are some of the misconceptions we’ve heard from business owners over the years.
“My business is worth the value of my assets, plus a premium.”
A business is only worth asset value when it’s being liquidated. The assets in your business are required to generate sales, and buyers don’t care how much you have invested in those assets; they’re more interested in the cash flow those assets generate. Assets include patents, contracts, and anything else that is fundamental to generating the predicted cash flow of the business.
“In my industry, businesses sell for two (or three, or four) times sales.”
A rule of thumb may be fine as a rough guideline, but it doesn’t account for the unique characteristics of a particular business. Every business is different.
“My competitor got bought out for $xxx, and my business should be worth just as much because it’s very similar.”
Again, no two businesses are alike, and no two buyers are alike. Your competitor may have been lucky, or maybe the business had something special that yours doesn’t. Perhaps there were terms of the deal that were not disclosed to you.
“There’s an exact formula for determining business value.”
There’s no such formula in existence. All anyone can do is come up with a range of values because business valuation is part art and part science.
“I got a formal expert valuation, so that’s what a buyer should pay.”
You’ll hear us repeat this over and over: a business is only worth what a buyer is willing to pay for it. Your expert valuation means nothing to a buyer.
“My business should sell for a premium because it has lots of potential.”
Buyers rarely pay for potential, unless there are documented plans and assets in place to realize this potential; they pay for your past and current results.
“The value of my business is based completely on the ‘numbers’—the financial information.”
While the numbers are important, there are many other factors a buyer considers when determining value. These are things, like opportunities for growth or the risks involved, that can’t always be measured by numbers.
“My accountant told me what my business was worth and he’s an accountant, so he should know.”
Depending on their specific background, accountants may not be the best source of information. Before you take someone else’s word, you should make sure they have the real-world experience selling businesses to back up their opinion. If they don’t, what’s the basis for their opinion?