If you've decided to sell your business, the first crucial step is to accurately determine its value. This is not a decision to be taken lightly, but rather a process that requires attention to detail and a thorough evaluation.
In this article, we'll explore the key steps in defining the value of your business.
Get ready to dive into the world of business valuation!
Selling a business: the 5 key steps to assess its value
1. Collect Financial and Business Documents
First of all, gather all relevant financial and business documents that are available for at least the last 4 years.
These documents include:
- Income statement
- Balance sheet
- Financial Statement (Cash Flows)
- Tax declarations
This data will provide an overview of the company's financial health.
2. Calculate a rough estimate of the value of the asset
Valuing a company is a complex process and can be done using different methods.
The valuation methods used to obtain a first estimate of the value of the asset are mainly three, namely:
- The Method of Multiples
- Discounted Cash Flow (DCF)
- The Comparables Method
Method of Multiples
The method of multiples is one of the most common ways to evaluate a company and is based on multiplying its financial data with market multiples, which vary mainly according to the sector to which it belongs, company size and historical period.
The financial data most commonly used in this method are two: Revenues (Turnover) and Gross Operating Margin (MOL, more often called EBITDA, which is the English version and stands for Earning Before Interest, Taxes, Depreciation and Amortization).
Below is a brief description of the two methods:
- Multiple of Revenues: the estimated value is obtained by multiplying the annual revenues of the activity by the most appropriate multiple of revenues based on the sector to which they belong and the company size. For example, if a company generates €500,000 in annual revenues and the multiple of revenues is 2x, the estimated value is equal to €1 million (2 x €500,000).
- Multiple of Gross Operating Margin (MOL, or EBITDA): the estimated value is obtained by multiplying the asset's gross operating profit by the most appropriate multiple of EBITDA. For example, if a company has an EBITDA of €500,000 and the multiple of EBITDA is 7x, the estimated value is €3.5 million (7 x €500,000).
Below are some indicative multiples of EBITDA and Revenue for some sectors.
Discounted Cash Flow (DCF)
The DCF method is an approach based on the company's future cash flows.
This method is more complex because it requires more time to evaluate future cash flows and to determine the discount rate.
Here's how it works:
- Future Cash Flow Forecasting: It is estimated how much the company will generate in terms of future cash flows. This estimate can be based on financial forecasts, growth rates, expected expenses, and investments.
- Net Present Value (NPV) calculation: Future cash flows are “discounted” to their present value using an appropriate discount rate. This rate represents the return an investor would require to invest in that company. The higher the risk associated with the company, the higher the discount rate will be.
- Determining Present Value: The present value of all discounted future cash flows represents the value of the company.
This method is based on the premise that the present value of future cash flows represents the company's intrinsic value.
Comparables method
The comparables or “market comparison” method involves evaluating the company by comparing it directly with similar companies that have been sold recently or that are listed on the stock exchange. Here's how it works:
- Comparable Data Collection: Financial and operational data are collected from similar companies in order to determine their market values or their multiples (such as the multiple of profits or revenues).
- Application of Comparable Multiples: The multiples obtained by comparable companies are then applied to the company being evaluated to determine its approximate value.
- This method is based on the assumption that similar companies will have similar ratings.
Each method has its advantages and disadvantages, and it is often wise to use more than one method to obtain a more comprehensive assessment. In this way, the estimate will be more correct because, if differences should emerge between the results obtained with one method and those obtained with another, then the data could be further deepened and changes made.
3. Evaluate Assets and Debts — the “asset” method
It examines all of the company's assets, namely:
- Inventory: Start by evaluating the company's inventory. It determines the market value of the inventory, which may vary depending on the type of merchandise, its condition and its demand in the market. Be sure to consider any obsolescence or excess inventory that could affect the value.
- Equipment and Capital Goods: Evaluate all equipment, machinery and capital goods used by the company. Consider the age, maintenance status, and market value of these assets. It may be necessary to consult experts or carry out an appraisal to accurately evaluate specialized equipment.
- Property and Real Estate: If the company owns land, buildings, or other real estate, it determines their market value. This can be done through a professional real estate appraisal or by evaluating recent sales of similar properties in the same area.
- Intangible Assets: Evaluate any intangible assets, such as trademarks, patents, copyrights, or loyal customers. These assets can contribute significantly to the overall value of the company.
Subtract any liabilities and debts (short and long-term, pension obligations, leasing agreements, etc.).
The result will give you the net asset value, which represents the company's net worth.
Remember that the value obtained may not fully represent the company's market value, since it does not take into account aspects such as the value of future profits. For this reason, the ideal is to combine the value obtained with the “asset” method with the methods seen in the previous paragraph to get a more complete idea of the actual business value.
4. Consult a group of experts
The valuation of a company can be complex, so it is advisable to consult an accountant, financial advisor or expert in corporate acquisitions.
These professionals can conduct a detailed assessment and provide a more accurate estimate of value.
5. Find the right buyer
Once you've estimated the value of your business, the next step is to look for buyers who are willing to buy it.
How to do it?
There are two main roads:
- You can decide to contact an agent or an intermediary who will assist you in the search for potential buyers. Please note that agents and intermediaries often require, in addition to the variable fee linked to the success of the transaction, also the payment of a fixed starting fee.
- You can enter your company data into Perpethua (www.perpetuthua.com). Our matching algorithm will select the best investors in line with your needs and the characteristics of your company and we will take care of supporting you throughout the process. Do you want to know more about how it works? Book a call with our experts by clicking here www.calendly.com/perpetuthua.
Choosing the right buyer is a critical phase in the business sale process. In fact, it is not enough to identify a potentially interested buyer, but it is essential to ensure that they are adequately qualified (i.e. that they are knowledgeable in the sector and preferably have previous experience in the field of acquisitions) and above all that they have the actual financial capacity to proceed with the purchase. This is a crucial point to avoid attempts at fraud or unnecessary waste of time.
Remember that transparency is crucial in this process, so don't worry about asking for financial information, references, and verifying the buying abilities of potential buyers.
At Perpethua, we are constantly working to ensure that potential buyers within our network are professional and qualified. We know how the sale of a company is a crucial and important moment for an entrepreneur, so we want to make the entire sales experience safe and pleasant.
Conclusion
In conclusion, the sale of a business is a significant step in the life of an entrepreneur. A correct valuation of the business is essential to obtain maximum value and ensure a successful transaction. Through a careful analysis of financial, operational and strategic factors, you can determine the real value of your company. In addition, proper preparation and the involvement of expert advisors can make the sales process smoother and more profitable.
Don't underestimate the importance of an accurate valuation, as it can make the difference between a profitable sale and a disappointing transaction. With the right approach and the right guidance, you can maximize the value of your company and pave the way for new opportunities for growth and business success.
Good luck!
