Importance of knowing the valuation of a company

When we talk about the whole transaction that two parties indulge in, we find many aspects of it answered, like strategic purposes involved, point to consider before getting into this transaction and much more. What we have struggle finding, is what we as customers really want to know. Although it is important for every individual who’s searching an interested buyer to have knowledge about each aspect, most important of all is to learn, How to Value a Business. When we talk about valuing business, more focus should be put on quantifiable measures while calculating the value of your business as it also helps the seller build an effective selling proposal.

Speaking of which, let’s take a look at some keys to understand how to value a small business:

  1. Know the exact valuation for the buyer

When we talk about selling a business or recapitalization, the buying side always prefers quoting a price considering the Seller’s Discretionary Earnings (SDE). Just like Earnings before Interests, Taxes, Depreciation and Amortization (EBITDA), SDE too is used by the business owners to calculate the actual valuation of the business which eventually calculates the purchase price in this transaction. When we consider big businesses on trying to determine the true value of their company, they often go with EBITDA as it includes multiple aspects that cover all the big operations of the business but when we’re talking about small businesses who are trying to understand how to value a business SDE is what they choose as an option. SDE can benefit small businesses because these owners tend to expense personal benefits too.

It is important for the buyer to fathom every fact about the SDE so as to understand how the owner on the selling side reached such a value and what do these valuations tell about the business itself.

  1. Organizing financial front of the business:

When two parties get into the transaction of business, it is required for both of them to keep their financial records up to date. But since it is an important function to carry out, it can be beneficial for the business to hire professional business brokers and leave all these responsibilities to them. Keeping in mind the importance of financial records in this transaction, choosing not to do this alone and hiring a professional can provide you with accurate calculations without the need for your attention. Speaking about their importance, financial records are one of the crucial documents while transferring the ownership of the company, making them essential for both the seller and the buyer.

  1. Keep a detailed report of your business (including assets, liabilities, source of revenue):

If you’re looking for a perspective buyer, you need to have detailed report that tells everything about your business, right from what it owns to who it owes anything to. Speaking of the same, having a detailed report can also help you build a selling proposal that sounds reasonable to the seller too. Considering this report as the premise for Valuing a Small Business, it can be said that keeping a track of all the tangible and intangible assets along with all the liabilities can be helpful for the acquiring business as an insight of what it is going into. Some of the important assets that play an important role in the valuation process are, property, cash in hand, inventory, copyrights, and patents. If a buyer finds them appealing, the transaction would then move forward. And as for the liabilities, as we know after the transaction it is the buying side that’s responsible for paying them, keeping a track of all the loans, accrued expenses, and other debts can be a help from the seller.

So basically, it is important for both the side to know how to value a company in order to undergo a successful transaction. And if we talk specifically about both the processes, the above tips prove to be beneficial in both the respects.

For the seller who looks for prospect buyers to take full control of his business, these keys can help him get the reasonable purchase price with total transparency in the process. While for the sellers who are looking for recapitalization, they can act as important steps to ensure a successful transaction and a prospect buyer that can help rebuild the entire organizations.

Whatever might be the case, if you’re looking for professional Business Brokers, feel free to connect with Rocky Mountain Business Advisors. Call us at (303) 474-5582 and find all the answers to your selling needs. We provide fines selling services to our clients that are entirely focused on quantifiable results and profit maximizing approaches. If you’re a seller and looking for a prospect buyer for recapitalization or total transfer of ownership, you can check out our services and allow us to assist you