When determining the value of a small business for sale, there are several important factors to consider. Although this decision is often an emotional one, it is important to remember that the dollar valuation is based on the current financial information, past activity, and potential future growth and revenue levels. There are four methods used to increase the valuation of a small business for sale: financial statement reporting, goodwill evaluation, market trends and future projections, and identifying factors that impacted negatively on revenue.
When selling a small business, it is important to involve your accountant, lawyer and senior management of the firm. An honest appraisal of the strengths, weaknesses, and potential revenue opportunities are important to document when preparing a business for sale. This process is much like selling a house or a car. The first step is to clean up the asset, make the cosmetic changes to increase its initial appeal, and then be prepared to negotiate the terms that you require. Have a clear idea of the upper and lower limits you are willing to accept, time lines, and any management responsibilities that you may want to continue in the new business structure, if any.
Any potential purchaser will automatically request the financial statements for the past four years of operation. It is important to note that the base assumption is that these statements have been audited, which is not always the case for small businesses. Auditing takes time, but provides assurances to the potential purchaser that the values in the statement are accurate and verifiable. Invest the time to prepare audited statements, as well as tax returns for review.
Goodwill is a term used in the sale and valuation of a business to describe unquantifiable items that have a direct impact on current and future sales. There are a host of accounting methods used to evaluate this item, but it should be supported by facts. Recurring customers, sponsorship of community events or teams, annual traditions that customers are familiar with, and general reputation are all part of goodwill.
Market trend information is available from the board of trade or the business association for your area. These reports are typically five to ten pages in length and describe changes in trends in the past two to three years, and provide a general forecast for the next three to five years. Be sure to obtain a report that is specific to your physical location or industry, as this type of information is very sector specific. These reports are usually published on an annual basis, so purchase one in advance to prepare for offering your small business for sale.
Many owners who want to maximum their return on a small business for sale will provide a management report, evaluating the factors that impacted profitability or revenues. A well-written report should include a set of action items that the new owners can implement to increase sales and profits. Providing all the information in a nice package will help potential purchasers see the current value and future potential in your firm.