I was proposed this question today and I thought you should here what I said.  First of all, there is no way to know  the actual value of your company.  There are formulas and generally understood guidelines but really the actual value will be what you are willing to walk away with matched against what a buyer is willing to pay.  I don’t mean to be vague, but it truely comes down to finding a buyer at the price you are willing to sell it at.  Now with all the qualifications set aside, there are some guidelines that you should consider.

First of all, in most business sales the buyer feels they paid too much and/or the seller believes the sold it for too little.   It’s a natural feeling when there is little to measure your judgement against so just be prepared, we all felt it and you will too.  Now to determine the value… of my business I decided I would first determine the cost of closing (estimated at 10% commission plus 2-4% other), the taxes I would have to pay on the gain and add that to what I it would take for me to walk away from my business and that determined my value.  I’m not saying that’s right, it is just the way I did it. 

Now that I had a value determined, I had to figure out what I needed to show a buyer to want my Company for that price.   I learned that there are different types of buyers and each of them had different pay threshold.  I learned I had to run my company for a profit instead of trying to minimize my tax burden (Ouch!).  I learned that I needed to be less involved and have people in place to show I was not required in the day to day business management.  I learned I needed to clean up my financials and put them in a format that a lender would like to see so the buyer can get financing.  Finally, I needed to show revenue growth, and even better, net profit growth to show we still had potential.   

After all that learning I now have a choice to make.  I can set in motion what I need to do to get the price I want knowing that it will take a couple of years or lower my sales price and have the buyer can take it “as is”.  I have always been the type to maximize my efforts and so I went along the path of less traveled and decided to set an exit plan with a set value and sell it when I get there.  Fortunately, I was able to execute on my plan (although it took three years) and sell my Company for the sale price I wanted. 

By no means is this the traditional way but I just wanted you to know that you can use the 3x gross revenue, 5 x EBITA and all the other online versions of valuing your business if you would like.  At the end of the day, all you need is one buyer that likes your business set at a price that you are willing to walk away at.  The more time you plan for it, the higher the price you will get for it.

This entry was posted on Wednesday, April 1st, 2009 at 1:46 am and is filed under Exit and Answers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.