Part of owning a business is being ready to sell it
Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.
Now that you have your business exit plan, what is next?
If you plan to sell your business, do you know what it will be worth? Most businesses were created with the intention of being sold at some point. Some entrepreneurs simply start businesses in order to sell the start-up to a larger company within the first five years. Other business owners start the business and run it, until the business owner isn’t able to run anymore. At either time, the business is going to need a valuation in order for it to be purchased by another person or entity.
A business valuation is a process used to determine the economic value of the owner’s interest within the business. In addition to estimating the selling price of a business, the same valuation tools are used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and so forth.
According to “Valuing a Business” by Shannon Pratt, Robert Reilly and Robert Schweihs, “before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value.”
The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its current form (going concern), or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt (sum of the parts or assemblage of business assets).
“Valuing a Business” continues to note: “Business valuation results can vary considerably depending upon the choice of both the standard and premise of value. In an actual business sale, it would be expected that the buyer and seller, each with an incentive to achieve an optimal outcome, would determine the fair market value of a business asset that would compete in the market for such an acquisition.”
Once the type of valuation or sale is to occur with the business, the business valuation reviews all aspects of the business. The business value looks at the products or services being offered, the hard assets of the business, client/customer lists, the market, the economy and more. Additionally, company size, age, likelihood of maintaining revenues, company location and protected intellectual property are also considered when deciding on the price of the business being sold.
While some business valuations see extreme complexity in the valuation process, other businesses seem to be sold on less concrete facts. In purchasing a business, most lending institutions are not able to provide the capital for the business purchase without a reputable business valuation. Like obtaining an appraisal for the sale of a house, businesses being sold require valuations to verify the selling price.
To gain additional help in learning about business valuations, contact your local Arkansas Small Business and Technology Development Center or visit Equitynet.com.
Setting a price for your business may only take a hand shake with the seller for some; however others will need professional assistance.
Stockman can be reached at [email protected]