Well before you're ready to sell your company, you'll want to determine its fair market value as a starting point for negotiations. Of course, obtaining a reasonably precise value for your business is often a complicated and time-consuming task. Accurate appraisals must weigh a variety of factors and incorporate numerous assumptions. The more precise the underlying numbers and suppositions, the more likely the appraiser's determination of fair market value will reflect what a willing buyer would actually pay. Here are two questions an appraisal should address.
- How does your business compare? If you're operating a service
business, your valuation will differ – often substantially – from a
company involved in light manufacturing or retail. Buyers will expect a
reasonable return on their investment, a return that is often represented
as some form of earnings multiplier. For example, your business may be
valued at three times projected earnings. Once determined, that number can
be compared to businesses of similar size in your market. Of course,
accurate valuations must compare apples to apples. "Earnings"
must be defined. Should "earnings" include or exclude the owner's
pay, interest expense, depreciation, or taxes? A careful appraisal will
also scrutinize the balance sheet. The basis for valuing tangible and
intangible assets (including non-compete agreements) and liabilities (such
as mortgages, installment loans, and accounts payable) should be clearly
laid out – before the business is put on the block.
- Will present trends continue? The future may be difficult to
predict, but a careful analysis should be based on conservative
projections, assumptions, and common sense. If, for example, the business
is expected to retain skilled management and employees, buyers may be
willing to pay a premium. If, on the other hand, the company is overly
dependent on a few products or customers, potential buyers may be scared
off. Or they may require concessions to mitigate perceived risk. Again, a
careful appraisal will consider many such factors and value the business
accordingly.
Remember: an appraisal is merely
a starting point for negotiations. The more accurate the appraisal, the more
likely the business will be priced correctly and potential buyers will be
attracted. Unfortunately, determining the fair market value of a business may
be fraught with missteps and faulty assumptions. For that reason, hiring a trained
and objective professional is often a worthwhile investment.
