When trying to sell their businesses, one of the first questions all business owners ask is, “What’s my business worth?”
Knowing your business’s street value is important. Not what you think it’s worth, but an objective dollar amount based upon sound valuation principles. The value of a business is more dynamic than that of a house or car. Significant components for establishing your shop’s value include:
- Tax returns
- Tangible and intangible assets
- Staff and sales history
- Market and competitive conditions
While the three latest tax returns are very important, a healthy profit trend over many years is evidence of good management. You need to evaluate assets, debt, salaries, inventory, and equipment, along with sales and profits: gross and net.
Tax returns showing respectable net profit despite sales fluctuations indicate sound management techniques. Competent managers monitor financial statements and make adjustments. Sound management practices signal astute buyers of a desirable enterprise to acquire, increasing its value.
Tangible assets include your inventory and equipment. Have a spreadsheet for each showing equipment brands with model numbers. For inventory, list part numbers with distributors. Show purchase price and date, current depreciated value, and today’s fair market value.
Ask yourself what you would pay for each item. On the equipment list, have photos of the most valuable items. Old inventory can be worth less than you paid. Obsolete equipment and parts are best cleared from your business.
Intangibles include your customer list, web site, social media, phone number, and vendors. For a buyer to consider these intangibles, you need to organize them and prove their value. Have spreadsheets with customers’ purchasing histories — ranked best to least — with contact names, phone numbers, and email addresses. Tie this together with your current strategic and marketing plans.
From the tax returns and accounting records, establish how your company compares to similar shops recently sold or now on the market. Compare financial ratios of net profit to sales, net to equity, assets to liabilities, receivables to payables, and others to industry averages and target benchmarks.
A healthy company culture today has a mix of new hires and stable employees focused on pleasing customers with quick job turnaround. Too many new hires or no new hires are both weaknesses. You want a millennial on staff to help with social media and communicating with your growing number of millennial customers.
Train the new hires with written practices and systems for getting cars out the door quickly. A systems-based business is worth more than one without clearly documented procedures.
Many industries have formulas for determining business value. For pharmacies it’s been $10 plus-or-minus, times the number of prescriptions per year. For magazines and newspapers, it’s a function of their paid subscriptions. In the auto repair business, one formula has been 35–40% of annual gross sales plus equipment and inventory
Once every three to ten years, we recommend getting a certified valuation. They can cost $3000 and up, depending upon the size of your business. It’s possible that, during the valuation process, a more accurate value formula can be built for your shop, which you and your accountant can apply annually to be sure you’re making progress to reach your value targets.
The Internal Revenue Service code makes it advantageous for business buyers to acquire assets, while sellers do best if they sell the business. The very act of identifying and establishing the value of your business beyond your assets increases your overall business value and your ability to sell it.
There are television shows about firms that specialize in preparing a house or business for sale. Clever staging and marketing can result in competitive bidding and a substantially higher price than the more conservative estimate a certified valuation expert may determine, and that the IRS will accept.
The suggested price that valuation experts offer can also vary because of volatile market conditions at different times of the year and changing local or national economic conditions.
In addition, there are differences between the various types of buyers: Family, employees, competitors, investors, and strategic buyers look for different business attributes, and will be willing to pay more for the businesses with the attributes they’re looking for. If you prepare your personal and tax circumstances, you can put as much as twice as much in your retirement portfolio from sales proceeds.
Your shop is worth what you make it worth. Like a car, if it runs, you can probably get someone to pay you something, but maybe not as much as it’s worth. Make everything about your shop sparkle in the sun and people will want it and will pay top dollar.
Valuation is an ongoing process. Determine what you want your business to be worth. Then make it worth more than that, and make your smart exit!