It is important to understand how to value and evaluate your business before selling it. Seller’s discretionary earnings are among the common methods used to value small businesses. You can use this method when evaluating your business for sale or when raising capital.
You can significantly boost your payout when selling your business by working with a reputable business valuation provider. These specialists provide you with an in-depth valuation report, complete with a detailed industry analysis as well as financial assessment.
While you may know it’s time to sell your business, the decision will not always be an easy one. You will not only need to consider key practical elements, such as the impact on your employees, the strategy of incoming management, and the financial arrangement, letting go of a business that took you a lot of time and effort to build from scratch can be emotional as well.
But what are some of the factors to consider when evaluating your business for sale? Read on and learn more.
1. The Seller’s Discretionary Earnings
When evaluating the value of your business, it is important to first normalize your business’ earnings to get what we call the seller’s discretionary earnings (SDE). This is your business’ pretax income before interest expense, owner’s compensation, non-cash-expenses, and one-time expenses that are less likely to continue in the future.
Why Seller’s Discretionary Earnings is Important
By calculating your SDE, you get a better idea of how profitable a business will be with the new owner. Here are some items you’ll need to add to the net income when calculating the SDE:
- Salary paid to the business owner(s)
- Non-cash expenses like amortization and depreciation
- Personal expenses, for instance, buying a personal vehicle
- Salary paid to family members holding non-essential positions
- Travel expenses that are not essential to running the business
- Charitable donations
- Leisure activities
To get an accurate valuation, be sure to factor in the above figures.
2. Your Sale Timing
When it comes to selling businesses, timing is a critical factor. You have to consider the market and the right moment to sell your business.
Your eCommerce business valuation will help determine whether it’s the right time to sell your business or not. You should not, however, wait until when it’s too late. Start preparing your business for sale as early as possible so you can build the value of the business over time.
3. Industry Research
Both buyers and sellers need to be familiar with the industry. Buyers will need to understand the industry before making an offer. On the other side, sellers who have a deep understanding of the industry trends can have an informed valuation that reflects their business assets and the current market.
The method of business valuation varies according to some factors, including industry strength. As a seller, you need to find much information about companies with the same business model, size, and revenue.
Understanding other peer companies will go a long way in helping you assess your potential growth and market share. You can then show potential buyers what makes your business a worthy investment.
Since the process of determining the true value of your business is complicated, it is important to consult a professional valuation expert instead of going it alone. However, if you want to do it yourself, you’ll need to first get your finances in order.
Both buyers and sellers need to put their financial records in order. Organizing your financial records is key to getting accurate calculations and goes a long way when it comes to valuing your business for sale. You’ll also need your finances in order when it comes to transferring business ownership.
To ensure a smooth valuation process, sellers will need the following documentation:
- Tax filings and returns
- Licenses, deeds as well as other proprietary documents
- Profit and Loss statements for at least three years
- Short business overview
While buyers might not need all these documents, they will still review their financials. Most sellers will want to see the buyer’s credit report as well as the basic financial profile.
5. The Seller’s Financial Prospects
As a seller, you need to consider the net proceeds to see whether it’s enough to get you through a non-compete period after transferring business ownership.
Remember the upfront dollar amount is not your net amount. So it shouldn’t blind you. The net amount you will get should be reasonable considering the amount of time you’ll need to sit with a non-compete agreement.