What Should Be Considered During a Valuation?
It should come as no surprise that when it comes to getting a business ready for sale, accurate financials are key. At Creative Business Services/CBS-Global, we recommend at least five years of financials. This will allow us to provide an accurate valuation. Now, while information like income statements and balance sheets may help us establish parameters for your business value, a figure based strictly on this information would not be the same as the price the market would truly bear. There are obviously a wide variety of external factors that will influence what you can actually sell your business for. Let’s take a closer look.
What Aspects Influence Pricing?
When you see web calculators that say they can determine business value and pricing, it’s important to note that these can be overly simplistic. Web-based tools fail to consider important aspects, and they focus solely on a multiple of revenue, income, or EBITDA. There are a variety of personal items that need to be added to earnings, not to mention the market forces. Pricing needs to be based on everything from your location to the availability of capital and external issues like scarcity of labor.
There is a lag time between the data that businesses report and the valuations of those businesses. It is necessary to have an in-depth understanding of niche markets, as these can impact value. It is not possible to just use a rule of thumb with multiples, as they are not always accurate.
Sometimes labor constraints can become a huge factor in determining value. For example, imagine a buyer is looking to grow or expand but cannot due to labor issues. On the other hand, labor can prevent competitors from entering a market, making a given business more valuable. If you already have an established team, this fact alone represents a lot of value for your company.
When companies have a large market share in a given location, it will typically prevent competition in that area. This factor can boost your company’s selling price. Longevity can also be a factor that will impact the value of your business. If a buyer is looking to get in on a region, this can allow you to charge a premium.
What are lending sources willing to give buyers to purchase a business? This is another factor that determines the price a business can ultimately sell for. There is traditional financing, but also, we must look at creative deal structures like seller financing. These factors can influence value, as opposed to the constraints of traditional lending. Your M&A advisor can assist you with creative deal structures like owner-based financing and earn-out provisions, and that can maximize the value of your business.
At Creative Business Services/CBS-Global, we start with a valuation, but we must also take into consideration what was determined years ago in the preparation stages. The pricing we advise for our clients is based on market value, market demand, and also, of course, the financial value of a business.
Glen Herman is Business Intermediary of Creative Business Services/CBS-Global.
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