Many small business owners only start to consider selling their business when they get an unexpected offer for it. Suddenly, the idea is churning in your head, and you wonder what you might sell your business for someday.
You may know what amount you’d like to get when you sell your company, but you likely don’t know the actual value that investors are willing to pay for your business. Fewer than 5% of all service contractors have ever had their business evaluated by an independent third party. Without an independent evaluation, you truly don’t know what your business is worth. This means that you’re vulnerable to undervaluing or overvaluing your assets when it comes to selling your business.
When it comes to establishing the value of your business, there are essentially three ways you can make it happen:
Self-evaluation is the process of the owner determining the purchasing amount of their business themselves. Most owners are not business evaluators, which means there is a high possibility they are going to make some major mistakes when self-evaluating.
The most common mistake you can make when self-evaluating is overvaluing the purchase price of your business. Overvaluing occurs because of the personal time and energy an owner has put into their business. This time and energy create an emotional attachment to the company, which can be confused for value from the owner’s eyes.
However, a potential buyer isn’t going to value your personal sacrifice. No matter how much the buyer respects your effort and hard work, the buyer values the potential upside of purchasing your business. The buyer is looking for a return on investment. Your pain and sacrifice, unless it has actually increased the value of the business, isn’t worth a premium.
Always remember: the buyer is looking for the best deal possible. This is what smart buyers do. If you are putting your business in the marketplace to be purchased, then you are putting yourself in the sight of smart and sophisticated buyers. These buyers will do their research on your company, and they will determine what fair market value is to them. They are going to try to negotiate to purchase your business below that value.
Offering a low amount does not make buyers unethical — it makes them smart. It’s what you should do if you’re looking to buy a business. It’s also why if you want to go to the negotiating table well-armed, then you had better do an independent evaluation of your business in advance of the offer.
An independent evaluation of your business is done by a third party. It’s a detailed examination and breakdown of your business’s current value. A good evaluation should be unbiased. It should state the current value of the company to the open marketplace. This number serves as a baseline for the owner and the buyer. It’s not a guaranteed number that you’ll receive when you sell your business. However, it is a benchmark that you can trust to be accurate and unbiased by either your own feelings or that of the buyer.
After you’ve put in all the work to plan an exit strategy for the sale of your business, don’t waste your effort by skipping this step. You need to become one of the smart, strategic owners who get the most accurate information before considering a sale. Todd Liles can help you do that. You’re the one who has put so much work and money into your business, why not get an accurate evaluation of its worth? You may be surprised by the assessment results, but you’ll be informed and ready to progress to the next step of selling your business.
In Part 3 of the Selling Your Business The Right Way series, we discuss the next step: understanding and prioritizing your buyout offers!
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