Valuing Your Home-Based Business
By Bill McBean
What is my business worth? It’s a question I’ve asked myself hundreds of times over my more than 40-year-long ownership career. And valuing your business, as an exercise, is a great thing to do from time to time — it gets you thinking and dreaming, which is not a bad thing. But it wasn’t until I started buying, expanding, and selling my own businesses that I really got a feel for what valuing a business means.
Now, after completing more than 100 buys/sells for myself and others, my understanding of value has become very clear.
When you start to value a business, whether you’re doing it because you’re selling or buying, there are three essential Facts of Business Life you need to bear in mind.
- The best time to sell a business is when you don’t have to, because that’s when it has the greatest value.
- If you don’t pick your own time to exit a business, regardless of why you’re doing it, something or someone else will, and that’s a value killer.
- Beauty is in the eye of the beholder — that is, the buyer — and the buyer’s banker.
These three issues have an overriding effect on your business’s value, and if you don’t understand their power it can be terribly costly.
In addition to these, however, there are a number of other important realities you must take into consideration when you begin to value a business:
* There are only two ways to sell, or value, a business — an asset sale or a share purchase — and the more you know about these alternatives, the better you will understand the business’s market value. An asset sale takes place when one party sells and the other party buys the assets of the business, free and clear of liens, so the seller is responsible for paying all income taxes, outstanding debts, etc. In other words, one business winds down and another begins. Most sales and business valuations are done this way. In a share purchase, or valuation, a buyer assumes both the assets and the obligations (liabilities) of the business. This is not a popular way to buy or value a business because there may be financial obligations that the buyer is unaware of, which can raise the cost of the purchase considerably. This method can, however, provide benefits for both the seller and the buyer and, if done skillfully, can raise the business’s net overall value.