It is important to let your emotions go when you are considering buying or selling a business. This will allow you to do an objective business valuation and determine a realistic and fair selling price. It is important to analyze the business objectively, examine the market and seek the advice of a professional business appraiser. What are some guidelines for a business valuation?

There are many options for business valuation. One method may be better than the other depending on what type of business is being valued.

1. Prepare the financial statements and calculate the SDE

This is the first rule of thumb when valuing a business. The owner must gather financial records from the last three years, including an income statement, cash flow statement, and balance sheet. Consider using a projection model if the business hasn't been in operation for at least three years.

Next, consult an accountant to convert the income statement to a seller's discretionary earnings (SDE) statement. This statement takes into consideration non-recurring purchases as well as discretionary expenses in order to better reflect your business's value.

2. Determine the value of the assets of your business

For business valuation, the second rule is to determine the asset value. Therefore, the first step in business valuation is to determine the value of tangible assets. This can be done by taking inventory and inventory of all physical aspects such as fixtures, equipment, and inventory.

Next, calculate the company's intangible assets. This includes intellectual property, partnerships, brand recognition, and contracts. It can be difficult to assign value to intangible assets. A professional appraiser or business broker may be able to help you.

Asset valuation can give you a better picture of the business's value, but it does not accurately reflect the company's earning potential. Buyers are most interested in the future earnings of their investment. Therefore, it is a good idea for buyers to estimate the company's earning potential using price multiples.

3. To estimate the business' value, use price multiples

Another rule of thumb for valuing a business is to use price multiples. These multiples base the value on the potential earnings of the business. Buyers can use price multiples to calculate their return on investment. These are easy ways to get a general idea of the price at which the business will sell.

After determining the asset value of the business, it is time to calculate the multiple applications to each industry and geographic region. This equation will give you a fair estimate of the business's selling price.

Nationally, the average business sells for 0.6 times its annual revenues. Once you have determined the annual revenue and the multiplier, it is easy to plug the numbers in and do the math. Choosing the correct multiplier for your business is important because they can vary greatly.

4. You can use comparables (or comps) of businesses that are 'For Sale' or sold

The most popular valuation rule is to use the recent sales of similar businesses. This will give you an accurate picture of how similar businesses are selling. In addition, you can better understand the selling price by identifying similar businesses that have sold within the same region.

You can access comp data through many online sources and brokers who can help you find the right multiplier in your market. For example, BizBuySell has over 50,000 businesses for sale and hundreds of thousands of businesses that have been sold. First, you can refine your search by industry or geographic location. Then, you can further narrow it by gross income and cash flow.

5. Increase the business's value

There are many ways to increase the value of a business if an owner is disappointed by its estimated value. The sooner an owner increases the business's sale price, the better. Buyers are attracted to businesses with the highest potential for future profits. The company will be valued if it can show evidence of several years' profit growth.

Buyers want an easy transition to their new business. This is why the business must be well-organized. It will be a big help to have a well-oiled machine with a complete package of financial records, compliance with safety and health regulations, employee policies, detailed financial records, and a tidy, well-organized list of staff with transferable contracts and suppliers lists, and a client base. As a result, potential buyers will be more impressed with the business and feel it is worth their investment.

Another way for owners to increase the business's value is through seller financing. The owner may benefit from part financing the sale, resulting in a higher selling price and more collected interest. There is also a greater pool of potential buyers.

6. Get a formal appraisal from a professional appraiser

A professional business appraiser will help you benefit from their expertise and provide the objectiveness that you might lack in making an accurate assessment of your business. Many brokers have contacts with professionals who are qualified to conduct formal valuations. In a competitive market, accurate valuation is crucial. In addition, a third-party professional can help to reduce seller sentiment and shorten the selling process by aligning the business value against current market conditions.