Are you considering selling your business in San Antonio, Texas? One of the most critical steps in the process is determining its value. As a business owner, sometimes the financial statements do not necessarily express the true value of the business. This is where a professional business broker comes in, as accurately valuing your business is essential to ensure that you sell it at the right price and maximize your profits.
Most business brokers tend to use the Market Approach, which provides a grounded “Opinion of Value”. Let’s discuss the 3 key elements of this method:
1. Establish your Seller Discretionary Earnings (SDE)
The first step in valuing your business is to establish your Seller Discretionary Earnings. This involves subtracting all of your expenses from your total revenue, leaving you with your net income. Adjustments are subsequently made by adding back the interest expense paid by the business as well as any benefits taken by the current owner, not forgetting to adjust for non-cash expenses such as Depreciation and Amortization.
Some examples of other adjustments include one-time expenses/income, adjusting the rent to reflect market conditions, and the salary of family members who are not paid market rates. These adjustments are important in order to reflect how the P&L would look to the new owner. It’s crucial to be as accurate as possible when calculating your SDE, as this will form the basis for your valuation.
2. The Use of Multiples
The next step is to consider multiples. This involves comparing the selling price of similar businesses in your industry to the SDE. The ratio that is derived can help you to determine a ballpark figure for the value of your business.
Our experienced team of brokers also considers all relevant factors, such as client concentration, the extent to which the business relies on the existing owner, business growth trends and the competitive landscape to evaluate if the multiple to be used should be the average, above average or below average.
3. Professional Valuation
VR Business Brokers San Antonio uses multiple SBA lenders to pre-approve the businesses that we bring to market, and our Opinions of Value tend to be consistent with the cash flow analysis performed by the bank.
In addition, banks will commission a formal Professional Valuation prior to closing, and our Opinions of Value have always been consistent with the market value which they arrived at. In the few instances where our market value was higher, we met with the appraiser and explained our rationale, which validated and led to the acceptance of our Opinion of Value.
At VR San Antonio, we understand how critical it is to accurately assess your business value. We can help you navigate the valuation process and ensure the most accurate appraisal possible. We also offer a range of services to help you through the process, including business valuations, packaging and positioning, and screening potential buyers. Contact us today for your free consultation!