startup mistakes

How to Value a Business

As an entrepreneur, you need to understand how to value a business – without that vital information, you'll have a tough time gauging your success.

You’ve worked hard to build a
valuable company, and now you’re ready to move on in life – maybe to
create your next dream business or maybe just to kick back and enjoy
the good life. But before you get too swept away with visions of the
future, there’s a paradox you must be aware of: More often than not,
you will believe your company is more valuable than your buyer will. So
how to value a business? To resolve this tension, it’s essential for
you to do everything you can to establish literal and perceived value
as you position yourself to negotiate.

We’ve put together a few tips to help you discover the true value of your life’s labor.

Determining value

Companies
are typically valued on some combination of their projected return on
investment (ROI) and net present value (NPV). Higher risk companies are
valued at a lower ROI, and rapid-growth companies usually command a
higher ROI. When valuing your company, you’ll need to consider many
factors such as the product line, the age (relevance) of the products
and how well they are respected in the marketplace. The higher the
market share and customer reputation, higher value you’ll be able to
establish. Value is also determined by whether or not the state of a
particular industry is growing or dying, as well as the competition
level domestically or abroad as the case may be.

Finding the best buyers

If
you are looking for someone to buy your company, look for a strategic
thinker or someone who sees added value in the integration with his or
her company. This could include immediate access to customers that the
buyer does not currently have access to, the ability to sell a combined
offering of both companies’ products to the combined customer base, and
significant savings due to the elimination of duplicated activities in
areas like finance, computer operations, sales, and executive
management.

Watch the debts

Once
you find a buyer, just how much cash will you get? This is determined
by the state of your financials. If you owe a lot of money, these debts
will be subtracted from the amount you finally receive.

Receive the receivables

The
buyer will consider your account receivables as cash required to run
the business. Since you will not get any value for the receivables, try
to get your receivables as low as possible months before the sale in
order to maximize the cash-out.

Consider a schedule

Also,
you can get more money for your company if you are willing to take a
payment schedule based upon the future success of the company, but this
is a much higher risk and fraught with potential for buyer abuse.

Of course, the best way to work toward a valuable exit is to have that desired exit in mind as you’re growing your business.
If you want to avoid surprises upon exit, regularly check your exit
strategy and revaluate your assets. Then, when you’re ready to sell
your business, you’ll have a better understanding of the true value of
your business, how much you can get for it, who the potential buyers
might be, a strong position to negotiate from, and a clearer path to
when you’ll receive your cash.

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