Whether looking to sell a business to retire or move forward with other opportunities, one of the first steps is to get an accurate estimate of the business’ worth. This business valuation process is more than just a quick estimation of the business’ worth. It is a labor-intensive process that, if done correctly, utilizes a combination of human resources, accounting, legal and financial experts to dig into the details of the business and develop an accurate valuation.
The process involves many steps often including use of a business valuation team to interview management, review financial data, and visit the business. This is part of the due diligence process. Due diligence is a thorough review of the business structure, asset, and liabilities to help get an idea of the present and future value of the business. In addition to the steps noted above, an important and relatively new area of due diligence is the review of the business’ digital assets. This should include a review of the business website and search rankings as well as the business’ ability to operate utilizing technological advances and security risks and mitigation measures.
Can I take steps to better ensure a strong valuation?
A bit of proactive action can help increase the business’ value prior to the sale. Valuations are often based on the business’ previous 12-month performance, but buyers’ expectations about future performance also play an important role in what they are willing to pay for the business. As such, establishing a clear path to profitable growth can help increase the business’ value.
But how do business owners help establish this clear path? A well-developed strategy that includes market analysis and projections for the direction of the market helps. It is also important to put together a team that will successfully represent your business. This includes both its past performance and future projections, to help better ensure buyers are willing to pay a premium for the business.
Additional steps that help get a strong business valuation include:
- Earnings report. A quality earnings report is important. It is generally wise to hire a third-party accounting firm or other professional to get these numbers in order.
- Legal representation. It is also wise to hire a legal team not only to guide the valuation process but also mitigate the risks that can arise after the deal is complete.
- Support current management. As noted in a recent piece by Forbes, the biggest killer of deals or cause of price reduction is often a drop in business performance at the end of the process. Reduce this risk by supporting current management so they can continue to thrive throughout the process.
Business leaders who take these steps are on the right path to a strong and accurate business valuation.