Why Business Valuation is Crucial for a Successful Sale?

Selling a business involves tangible assets and intangibles such as location and labor. 90% of business buyers seek businesses with profits, not goodwill. Minneapolis is a great place to live and work with good schools and access to the great outdoors that only Minnesota can offer. But if your business is only breaking even or losing money, it will be very difficult to sell.

How Do I Value My Business?
Business valuation professionals suggest that you look at your financial statements first. Owners tend to use the IRS TAX Forms to show their income after taxes. But this doesn’t reflect the true net income of the business. The Profit and Loss Statement should be restructured into an “Adjusted Net Income” statement. Expenses such as your salary should be placed back into the income stream since your salary is not considered an expense. Why? Because the buyer may not see that as income but assume it is an expense that he cannot control.

Other areas that are taken off the P&L are depreciation, interest, and bank fees. Anything under the buyer control may be different from your control. So consult with an expert to be sure the financials will help the buyer to compare “apples to apples.”

How Do I Value the Business?
Once the cash flow is defined as “adjusted net income,” the business will sell for multiples. In the go-go economy before the financial crisis, multiples of 3 to 6 times were common. In this post-financial crisis climate, multiples of 2 are a common rule of thumb. If the business is retail, the multiple is 1.8. Manufacturing is closer to 2.8. As a general rule of thumb, a cash flow of $150,000 will use a multiple of 2 and the business is valued at $300,000. This is an easy method to business valuation. Minneapolis professionals can provide further insight.

Remember, the buyer knows the multiple of your industry. When the business is advertised as being worth $300,000, the buyer assumes the cash flow is $150K. If that is not on the financials, kiss the buyer good-bye.

How Do I Stress the Intangibles?
State the advantages of the business. Is it located in a busy shopping mall? Is it an outdoor sports business (appealing to winter sports buffs)? Maybe it is located on a lake and you have great employees. Also, state the seller is motivated to sell and is offering self-financing to qualified buyers. That should help you get inquiries.

Need help valuating your business in Minnesota? Visit www.sunbelt-business-advisors.com to begin the valuation process.

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