The small-business market has gained momentum over the last couple of years. In fact, the number of small businesses that changed hands during the first half of 2016 surpassed the same period in 2015 and the previous record set in the first half of 2014.1
This is good news for business owners who need a thriving market to sell their businesses, especially those who have a large chunk of their personal wealth at stake.
One survey found that nearly half of small-business owners intend to sell their businesses in the next five years.2 If you are one of them, you might keep a close eye on the value of your business.
Fair Market Value
Lenders generally require a professional valuation before extending credit to interested buyers. An accountant or business appraiser may employ one or more of the following methods, depending on the nature of the business and other relevant factors.
Asset-based approach (also known as cost approach). Considers the fair market value of fixed assets and equipment and the wholesale value of current inventory, minus any liabilities.
Market approach. Compares the business to similar enterprises that have sold recently, adjusting for differences in size, risk, market position, and other characteristics.
Income approach. Calculates a value based on the company’s ability to earn income. Basically, the average earnings over a certain period of time are divided by a capitalization rate that typically applies to the specific industry.
The value is often expressed as a multiple of net income or revenue. An element of subjectivity means a seller and a potential buyer could draw very different conclusions when assessing a firm’s value, so competing figures might become the starting point for negotiations.
To help sell your business at a better price, spend some time cleaning up the books and the facilities. Because it often takes many months to find a qualified buyer and finalize the transaction, it might be wise to research the market and plan for a potential sale long before you intend to make your exit.