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Business Valuation 101: What Is Your Business Worth?

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As a business owner, there’s a high likelihood your business is your most important financial asset. Even so, if you’re like most business owners, chances are you don’t know what your business is worth.

The fair market value of your business won’t be found in your financial statements or tax returns. You won’t get the answer from your accountant or attorney. And the sale prices of similar business transactions can be hard to find, as sales agreements are usually kept private. 

You can find the fair market value of public businesses on the stock market, but that’s not the case for a private business. While public company valuations can provide some context, it’s hard to translate that data to a small, privately held business…even when you take into account the difference in size, stability, liquidity, and other factors.

So how do you determine the value of your business? This is where a business valuation comes into play.

What Is a Business Valuation?

In short, a business valuation is the process of determining the value of a business. During this process, all aspects of the business are evaluated in order to determine its overall worth.

However, it’s not as simple as it sounds. Business valuations are complex, subjective, and highly dependent on relatively abstract factors like location and anticipated earnings. They involve a fine-tooth assessment of cash flow, projected growth, and internal and external risk factors that help determine the fair market value of your business.

Ultimately, a business is like any commodity: it’s worth what a buyer will pay for it. 

If a buyer has a strategic reason to acquire a business, the sky could be the limit as far as value goes. If not, the value of your business may look very different. Having a professional evaluation of your business’ value is crucial to a successful sale.

At OIB, we help you determine a price that is both fair to you and attractive to a buyer, based on our extensive knowledge of the market.

We have a built-in advantage over most other appraisal firms: we’re engaged in the market of selling and buying businesses every day. We know what businesses sell for, because that’s what we do, day in and day out. Our valuation is more than an opinion: it’s supported by data from the sale of thousands of businesses, as well as from databases providing statistics from business sales across the country.

Why Would Your Business Need a Professional Valuation?

While the most obvious time to appraise a business is when it’s about to be sold, business appraisals are valuable in any number of situations, including:

  • Buy/sell agreements
  • Estate planning
  • Stockholder disputes
  • Tax disputes
  • Business expansions
  • Changes in partnership
  • Divorce settlements or other personal life changes

…and many more. But you don’t have to wait for one of these events to happen to have your business evaluated. Just as you should always keep your business plan up to date, it’s ideal to always have an updated valuation of your business so you’re prepared in case an event arises where you need it.

How Are Business Valuations Calculated?

There are four main types of valuation most business appraisers use: Liquidation or Other Assets-Based methods, Investment Value/Capitalized Earnings, Excess Earnings, and Discounted Cash Flow/Future Earnings.

  • The Liquidation or Other Assets-Based analysis estimates the resale value of hard assets, then subtracts business debts to reach an asset-based value. This method assumes the business will cease to exist and all assets will be sold to pay off liabilities. Liquidation is best used for businesses that aren’t making money and whose tangible assets are worth more than the value of the business (based on earnings).
  • With the Investment Value or Capitalized Earnings method, you would first determine earnings over the next 12 months, then determine the desired rate of return, based on risk. Risk is calculated based on a comparison of alternatives (bank, securities, etc) and the rate of capitalization. This method is useful for businesses that aren’t making money and whose value based on earnings exceeds the value of their tangible assets.
  • Using the Excess Earnings method, you would first determine the value of tangible assets, the cost of owning the business, and the value of earnings. You would then subtract the cost from the earnings to determine excess earnings. From there, you’d apply the rate of capitalization to the excess earnings. Finally, you would add the capitalized excess earnings to the tangible assets to determine the value of the business.
  • The Discounted Cash Flow (DCF) or Future Earnings method attempts to estimate future cash flows, and uses that to determine a business’ current value. However, this method is rarely used in the sale of a small business.

Ultimately, the most reliable indicator of your business’ value is what a buyer will pay for it. Buyers decide what they’re willing to pay for a business based on how much they think the company will make them. 

This means you need to be prepared to represent your business with well-presented documentation, an investment thesis, and knowledge surrounding how to counter price-chipping (a common strategy buyers use to lower the sale price by identifying possible issues with your business).

At the end of the day, evaluating a business is a complex process. Even if you follow every guideline and piece of advice you can find, there are assets or issues you’re going to miss. 

That’s why the best course of action is to call in a professional like Opportunities in Business. With our experience, specialized knowledge, and tools, we can give you the most accurate estimate of your business’s worth. Plus, as business brokers, we can help you find the buyers you need and guide you through a successful sale.

Contact the team at OIB today to get started on your business valuation.

 

Why OIB MN?

Why Hire Opportunities In Business? What Sets Us Apart?

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Selling a business is complex. 

From determining a sale price and knowing how to market your business to finding a qualified buyer and tying up the loose ends to close the sale, there are seemingly thousands of details to address. It’s a process that requires careful planning, often years in advance.

That’s where a business broker like Opportunities in Business (OIB) comes in.

Working with an experienced, trusted business broker like OIB could mean the difference between selling your business at a fair price with a smooth transaction and struggling through the process, only to lose money…or worse, not selling at all.

Read on to learn more about what OIB does and why our clients choose to work with us again and again.

What Role Does OIB Play in a Business Sale?

Expertise in running a business doesn’t necessarily translate to expertise in selling it. While some owners may succeed in selling their business on their own, the vast majority don’t have the expertise or knowledge needed to do so.

Having an experienced business broker by your side can make for a smoother, more successful (and, often, more lucrative) sale. A professional broker brings valuable skills to the table, including: 

  • The resources and expertise for accurate business valuation 
  • Effective marketing skills 
  • A firm understanding of current market conditions
  • Exposure of the business to a wide market 
  • The connections and expertise to help a buyer obtain financing
  • Experience closing business sales transactions

Hiring a business broker like OIB to handle your sale allows you to stay focused on what you do best: running your business.

When you work with OIB, we provide the services needed to bring your transaction to a successful close, including: business valuation, material and record coordination, marketing plan implementation, buyer qualification, sale negotiation, and transaction closing. We will also secure the advice of other qualified professionals—such as lawyers, accountants, and financial consultants—as needed. 

More Than 40 years of Experience

Established in 1981, the OIB team has more than 40 years of business brokerage experience. 

Over those four decades in business, we’ve participated in the sale and purchase of hundreds of businesses. 

Working with an experienced business broker like OIB gives you an advantage in selling or buying a business. As a seller, we’ll help you determine the value of your business, prepare it for sale, market it nationwide, negotiate the sale, and bring it to a close. And if you’re buying, we can help you find the business you’re looking for, negotiate a fair price, assist you in obtaining financing, and ensure a smooth closing.

Experts in the Business Sales Process

At OIB, we have broad business sales experience—there isn’t a single type of business sale we haven’t facilitated! \

We are experts in the process. From business valuation and preparing a business for sale to closing the transaction, we are involved every step of the way. We can even help buyers find financing options (including SBA and conventional loans), and connect our sellers with qualified buyers. Ultimately, there isn’t an aspect of the business sales process we can’t help you with.

And whether you’re buying or selling, we understand and respect the need for discretion and confidentiality that comes with a business transaction.

Knowledge in a Wide Range of Industries

We also work to become experts in every vertical we work in. As you can imagine, the operational intricacies of one industry can be vastly different from that of another. The sale of each business, therefore, will also look very different. 

Our team has helped clients from a broad range of industries buy and sell businesses. We’ve made successful sales in industries from wholesale manufacturing to credit card processing firms to foodservice…and many more. 

With each new account, we dig deep into their business and the wider industry, gathering information and asking questions to fill in any gaps in our knowledge. This due diligence allows us to learn the ins and outs of each industry so we can speak the language of that particular market segment and ensure a smooth sale.

Hundreds of Satisfied Customers

We have worked with hundreds of clients, and have earned a reputation for excellence in our industry. In fact, a significant portion of our business can be attributed to positive reviews, referrals from past clients, and satisfied clients returning to us for multiple transactions.

We have dozens of five-star Google reviews from happy past clients. Here’s what a few of them have had to say about working with our team: 

“Working with Mac not once, but twice, was a seamless process. Was always available when I needed to talk. Provided step by step process and details so that I could understand what was happening.”

“Peggy gets a solid 10 out of 10 rating from us. She was so helpful helping us sell our business and also extremely helpful to the buyers. She always answered her phone and responded to emails very quickly. She had the answers to any questions we had and gave us great advice through the process. Thank you Peggy!!!”

“Bill did a fantastic job helping me sell my restaurant. He worked with me to determine a fair price for the business and helped me navigate the sale even when things got a little rocky. Bill kept the buyers on track even when the usual cold feet came into play. He assured them of the quality of the business and helped them see and remember the reasons why they were looking to buy a business in the first place. Bill was extremely professional, but never pushy. I would recommend Bill to anyone who is looking to buy or sell a business!!!”

“We’re so glad we had Jim E. of Opportunities In Business involved in the sale of our liquor store from beginning to end. He dealt with prospective buyers professionally, represented our best interest and made certain all ‘t’s were crossed and ‘i’s dotted. He answered all of our questions while guiding the buyer through the paperwork and necessary approvals so that our sale went through correctly and swiftly. I highly recommend him!”

“We were referred to Peggy because of her experience in selling small businesses. With her expert guidance our business sold in about 6 months. She walked us through every step, was very knowledgeable and was a delight to work with. We are extremely grateful for her support and highly recommend her.”

“First class experience all the way around! Mac really set the bar in terms of knowledge, connections, experience, and overall professionalism. Highly recommend 🙂”

If you’re looking to buy or sell a business this year, or if you’re curious about the value of your business, Opportunities in Business would love to help. Contact us to discuss buying, selling, or a business valuation today!

Tips for Buying a Business During Uncertain Times

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Maybe you’ve thought about buying a business but in light of world events and the current economic crisis, you’re thinking about putting that dream on hold. We’re here to tell you that, equipped with the right resources, this may be an excellent time to make that purchase.

Investigate recession-proof businesses

Unfortunately, many businesses are hurting right now. In light of the quarantine and shelter-in-place orders, business owners are laying off workers and closing their doors. Many are afraid they may not be able to outlast the current crisis and that their businesses will fold. For every tragic story of struggling businesses, there is a story of hope – businesses that are thinking outside-the-box and businesses that are flourishing, despite the economic downturn. When it comes to purchasing a business, recession-proof businesses are excellent choices. They span many industries including food, home maintenance, auto maintenance, legal services and eldercare.

Do your research

Set yourself up for success by doing thorough research into the industry, market comps and the company’s books before entering into negotiations with a potential seller. Consider hiring professionals – a broker, an accountant and an attorney – to make sure no stone is left unturned. This may be the single biggest purchase of your life so investing in the research process is highly advisable.

Focus on tangible assets

Intangible assets include but are not limited to brand names, trademarks and customer base. Especially in a recession, the value of these assets may be largely irrelevant. The value of tangible assets, however, is easier to nail down, allowing the buyer to hone in on the actual value of the business regardless of the current economic situation. Ask the seller to itemize both the tangible and intangible assets to the best of their ability so you know precisely what you’re looking at. In a recession, make sure you’re paying the going rate for tangibles and substantially less for intangibles. This will prepare you to write a solid offer.

Operate with cash

During good times and uncertain times, one thing stays the same – cash is always advantageous. During rocky financial times, lenders may raise interest rates to mitigate their risk. The less you have to rely on financing, the better off you are and the stronger your offer appears.

Want to learn more? Check out our tips for savvy buyers!

If you’re in a good position to make a business purchase, don’t shy away in light of current events. This may be your moment. Contact us at 612.331.8392 or by email at info@oibmn.com.

OIB Business Terms

Common Transactional Terms & What they Mean!

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One of our main goals at Opportunities in Business is to simplify the real estate process. On this note, let us walk you through some common terms and definitions you’re likely to hear on the real estate scene! 

Add Backs: An expense that is not considered an actual expense but is added back to company profits. 

Asset Purchase Agreement (APA): A legally binding agreement between a buyer and seller that encompasses the terms and conditions of the sale. 

Asset Sale: Selling business assets to increase cash flow or to liquidate. Ownership of the parent company doesn’t change. 

Balance Sheet: A statement that lists assets, liabilities, expenditures, equity, etc. from the company start date until the present. 

Business Appraisal: The estimated value of a business. 

Bill of Sale: A document the seller gives to the buyer once a transaction is complete. It is proof of the transaction. 

Cash Flow: When expenses are deducted from net revenue, this is the remainder. 

Closing Statement: A document issued once all parties have signed on the sale and purchase and money has been distributed to the seller. 

Copyright: Legal protection to a content creator for their unique work. 

Commission: The amount a broker receives for facilitating a business sale. It is often calculated as a percentage of the sale. 

Covenant: A promise in a written contract or deed. 

Due Diligence: A period of time after signing a contract where the buyer can investigate financials and other business details in order to determine if they wish to move forward with the process. 

Deal Flow: The number of deals a broker is currently processing. 

Earnest Money Deposit: Money the buyer puts down in a transaction to clarify their intent to negotiate on the purchase. 

Escrow: Money held by a third (neutral) party on behalf of two transacting parties. 

Exclusivity: A period of time during which the seller is unable to list their property with another broker and the broker maintains the right to a commission if the property sells during this time. 

Fulfilled by Amazon (FBA): An e-commerce service in which third-party vendors store their products in Amazon warehouses and Amazon is responsible for fulfilling orders from start to finish. 

Hours to Manage: The number of weekly hours the management of a business requires – critical information for determining the valuation of a business. 

Letter of Intent (LOI): A document declaring the intent of one party to do business with another party. 

Listing Price: The price of a business listed for sale. 

Non-compete Agreement: A legally binding agreement between a buyer and seller in which the seller agrees not to compete with the buyer in a similar profession or trade for a certain duration of time. 

Non-disclosure Agreement (NDA): A legal contract between two parties that outlines the confidentiality of the business. 

Partnership: A legal business structure between two or more individuals. 

Profit and Loss Statement (P&L): A financial statement that summarizes a company’s financials over a period of time. 

Software as a Service (SAAS): A software application hosted over the internet as opposed to on a traditional desktop. 

Trailing Twelve Months (TTM): A report that details the past 12 consecutive months of a company’s performance data. 

Valuation: The actual listing price of a business. 

The brokers at OIB have the knowledge and experience to help you navigate a business purchase or facilitate the sale of your business. Reach us anytime at 612.331.8392 or by email at info@oibmn.com.