We have a certified valuation expert on staff (that’s what the letters CVA after Cathie’s name stand for) and we recommend hiring one of those if you’re seriously looking to sell your business. The accuracy of the numbers are absolutely essential to getting you the best offer from a buyer, and that requires weighing various factors and making complicated assumptions. However, if you want to understand what the analyst would be looking at, or if you want a general idea of how much your business would be worth yourself, consider the following:
Compare
Look at comparable companies using projected earnings. A Brewery is not a Carwash, and neither is a Lumber Yard, so first it’s necessary to understand the general parameters of the business that you’re trying to evaluate, and then project three years of earnings. After that, compared to a business similar in size and in scope, how do those projected earnings compare?
That also means that you need a definition of earnings, so that you’re comparing the same thing between businesses. That’s often more complicated than it seems at first, because does that include the owner’s pay, the interest expenses, depreciation, or taxes?
Examine
The balance sheet will also be carefully examined for everything, including intangible assets (what clients do you have good relationships with, how awesome are your employees, and what kinds of contracts is the company in?). All of your liabilities will have to be examined as well.
Predict
Once you understand the business model, you should be able to make some reasonable but conservative predictions about the future of the company. Are experience management and personnel planning going to be sticking around? Is the company unusually dependent on a few clients or suppliers? What is the outlook for the business as a whole? We wouldn’t expect the market for fidget spinners to last that long, for example.
Summary
An appraisal is the starting point for selling your business, and there will be lots of negotiations before anything is final. Hopefully though, you’ll recognize that this is a complicated and specialized field, and you should hire an independent and objective expert like Cathie.