If you have a small business for sale in Colorado, now or in the future, you need to know what your business is worth. While there are some basic steps to follow, all business valuations are unique.
Adding up capital assets isn’t a business valuation. A buyer isn’t interested in selling your assets, rather it is the cash flow that these assets help to produce. They want to know how much money they can earn through your products and services, minus any cash tied up in your business.
To know the amount of money you are making and what you are projecting to make in the future, you must look at gross income and expenses, including your salary or shareholder wages. This establishes a net profit. It shouldn’t take more than a couple of weeks to calculate an accurate net income if you do proper bookkeeping.
In business valuations, investors or buyers may rely on multiples calculated with risk factors in your industry compared with the size of the business. It may sound complex, but it’s just a way to determine the amount of profit growth or decline you can expect over a period of years. Start by looking at historical financial data for your company, the market’s expected growth, productivity, efficiency, and how you compare to your competition. This takes some work and market research.
If you haven’t kept consistent financial records from the start, research can take some time to put together. Doing this now will prepare you for a sale in the future.
A business valuation boils down to knowing what buyers care about:
- Know your annual revenues, net income, cash flow, and profit margins. Keep records available and up to date with profit and loss statements, balance sheets, tax returns, accounts payable and receivables reports.
- List your tangible assets, including real estate, equipment, machinery, furniture and fixtures, inventory, accounts receivable, and intellectual property, to determine their current values.
- Assess intangible assets, including a consistent record of growth, loyal customers, strong vendor relationships, brand recognition, unique products or services, high website traffic, below-market leases, significant social media following, and any guaranteed contracted income in the future.
- Make sure you have repeatable, efficient systems and processes. The better your business runs, the higher the value.
- Add value by keeping your management team in place after you sell the business and agree train a buyer to ensure a smooth transition for the new owner.
- Evaluate your customer base. A larger, more diversified base will demand a higher price. If one customer makes up more than 15% of your revenues, you will want to increase the number of customers so that you will have a cushion should your largest customer leave.
- Track your debts and obligations to lenders, vendors, or anyone else to subtract from the value of your business. This includes unfavorable contracts or real estate leases.
You’ll need to compare your current growth rate against your market to have reasonable evidence that suggests buyers can expect similar levels of growth.
While you can evaluate market growth yourself, ask financial experts for assistance, other business owners in your network, or a Colorado business broker.
Your valuation is a guide. You can present it to investors and buyers to provide reasonable answers about the worth of your small business for sale in Colorado. But your business will also be impacted by market value. It is only worth what someone is willing to pay, and your calculations should get you close to what the market supports.
If you need to sell, then you can’t afford to be stuck on what you believe your business is worth. Some industries have fallen on hard times due to COVID-19, and their business value may be off. Timing still matters. If your brand is strong and your accounting records show that you are worth more, a Colorado business broker can leverage your strengths to negotiate the most lucrative exit possible.
Rocky Mountain Business Advisors is a business brokerage focused 100% on selling our clients’ business. As Business Brokers, we fathom it as our responsibility to apply a proven process to educate, prepare, and guide our clients through the sales process so that they can focus on managing their business while we focus on a successful sale. We bring a strong sense of urgency and tenacity to every engagement to realize the