Considering Your Options: 7 Early Questions To Ask Yourself
When owners begin to consider the value of their business, they need to know the answers to these questions:
- What am I selling?
- What will the market bear?
- How do I calculate my sweat equity as part of the valuation?
- Will I receive the entire sale price at closing? Will some of the proceeds be held back or financed by me?
- Are future opportunities and past investments fully considered in the sale price?
- Will I have any obligations after the sale?
- Is there any value in agreeing not to compete with the new owner?
When a potential buyer is looking at your company, the questions are similar, but posed, of course, from a different perspective:
- What am I buying?
- Are past earnings a reliable guide to future prospects?
- What’s the lowest price I can pay without scuttling the transaction?
- How stable is management? How long will the seller be available to assist in the transition
- How stable is the market, including any public funding, going forward?
- How long will it take me to recover my investment?
- How much risk can I get the seller to assume?
Naturally, sellers and buyers will look at the same documents and come up with different conclusions. Why? You want to get the highest price, and the buyer wants to get the lowest. It’s been going on for centuries! Business valuations provide common ground because they’re based on generally agreed upon principles. There are many ways to value a business. For buyers of businesses, some of the most significant issues in a typical middle-market transaction include:
- Cash flow and profitability of the business, usually estimated with a calculation of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)
- Market segment and future opportunities
- Size of the business (EBITDA and annual revenue)
- “Fit” with buyer’s strategy and organizational structure
Taking the time to consider your options out front will increase your opportunities further into the future.