There are just under 32 million small businesses in the United States. For some, these are full-time ventures while others treat them as side hustles. Yet, at some point, everyone decides that they are ready to get out of a particular business.
That leaves you with the question of what you should do with your existing business. If you’re considering selling, you face two problems: finding buyers and valuing the business. While a business broker can help you with the first problem, can they help you with business valuation estimates?
Keep reading for a breakdown of business valuation and business brokers’ role in the selling process.
What Are Business Valuation Estimates?
Every business owner has a number in mind when it comes to what their business is worth. Yet, these numbers are often guesses or intuitions based on things like profit margins over time.
Potential buyers are not often moved by these guesstimates and intuitions. They want a number based on a more solid groundwork. A business valuation estimate is a more formal, fact-based version of a business owner’s estimate that you can present to potential buyers.
There are several approaches to business valuation, such as:
- Income-based valuation
- Asset-based valuation
- Market-based valuation
The exact method of valuation can depend in part on the type of business you run.
For example, let’s say that you run an accounting business. Unless you happen to own your own building, you don’t have a lot of tangible assets. So, an income-based approach may make more sense.
A manufacturing concern, on the other hand, will own lots of assets. So an asset-based approach may make more sense. Of course, valuation depends on more than just hard numbers.
A realistic look at income, income potential, and assets lets you arrive at a number, but it’s out of context. For a true sense of the value of your business, you must consider four other factors:
Demand is fairly straightforward. If you operate in a high-demand business sector, you can expect more interest and a potentially higher price.
For example, a cybersecurity business will generate a lot of interest because of the ongoing cybersecurity shortage. The raw demand for the service adds value.
Utility is all about what the buyer wants out of the buying process. Can buying your business fulfill a need or desire they have?
Scarcity is the measure of the difficulty a buyer will have in finding a similar buying opportunity. Do you offer specialized services that are difficult to replicate or are there lots of similar businesses?
Transferability is about the ease of switching owners. No one wants a business where half the staff will quit five seconds after the sale becomes final. Are your processes well-documented and easily understood?
A good valuation rolls the above considerations into the final number.
Business Valuation Realism
For business owners, the process of estimating the value of businesses often starts out as an ego-stroking exercise. They believe they know what that business is worth and expect that the valuation will reflect that belief.
It’s understandable because people pour so much time and energy into the businesses. Unfortunately, business valuations routinely come back with lower numbers than the owner expects. The value mismatch typically goes back to the DUST evaluation.
Many business owners launch a business because it fills a specific niche in a local market. That makes the business profitable in that location, but it’s not necessarily replicable. That puts a hard limit on its income potential.
It can also limit the business’s attractiveness to non-local buyers. If your entire field of potential buyers is local, that can also limit the business’s realistic value.
Business owners often underestimate how much of the current value of the businesses are tied up with the business owner themselves. People don’t buy a product or service, so much as they buy a product or service from you.
You should go into any business valuation with the expectation that the number you get back will prove lower than the one in your head.
Role of the Business Broker
The role of the business broker, at face value, is that they connect the business seller with potential business buyers. Of course, the broker does more than that.
They’ll often provide advice to the seller in terms of making the business more marketable. They will also know professionals in related fields, such as accountants or business lawyers, that will help facilitate the process.
The broker will usually take on the brunt of the actual marketing duties, as well as due diligence, and even negotiating with potential buyers.
Can a Broker Help with Business Valuation?
The short version of the answer is, yes, a business broker can help with a business valuation. The long version of the answer is a little less straightforward. While brokers can help, not every broker provides business valuation estimates.
Many brokers who do offer valuations charge for the service. The charges can vary from broker to broker and from business to business. Some brokers will charge a flat rate, while others charge based on the size and complexity of the business.
For example, providing a valuation for a single-location bakery is far less complex than the valuation for a six-location local restaurant chain.
You should always inquire with the broker what rates they charge and how they arrive at that number.
Business Broker, Business Valuation, and You
If you decide that you should sell your business, you will want a business valuation. It gives you a realistic sense of what you can ask for the business from potential buyers. Just remember that most valuations prove lower than business owners expect.
One way of getting that business valuation estimate is through a business broker. Many brokers will offer it as part of their listing process or as an independent service. Just make sure you ask about their fees.
Visionary Business Brokerage specializes in helping small business owners sell their businesses. For more information, contact Visionary Business Brokerage today.