Preface : Businessmen shepherd net-worth. Teachers shepherd self-worth. -Anonymous
Business Valuations For Transition
For more than two decades Andrew had been spending his time as a small business owner. His side hobby of auto repair gigs had grown into a full-scale auto service center with a twelve-bay garage including space for RVs and large truck service and repairs. Andrews Auto had a team of 10 employees that far exceeded his initial vision of helping keep vehicles in great driving condition in his community.
Most days, Andrew watched his management team keep the business running like a Swiss watch while he drove around town running errands and talking with locals at the café. He enjoyed every moment of the opportunity to grow his business and now is thinking about his approaching retirement. That includes cashing in on his cumulative years of toiling to keep up with his business opportunities and growing his business investment. Andrew decided to advertise his business on the marketplace for three million dollars himself. After all, he built the business, so why would he need someone to help him sell it?
Following several months of waiting for an interested bid, a potentially interested party texted him with an offer for $1.0m. The bidder said his offer was fair based on Andrews Auto’s annual seller’s discretionary earnings of $500,000. Andrew never betted that selling a business could be this challenging.
All too often small business owners don’t obtain the experience of a trusted advisor when beginning the process of selling their business, resulting in problematic and unrealistic expectations. This can create unnecessary challenges in the process for both sellers and buyers. Secondly, often small business owners don’t know what they don’t know about the business transitional process, and proper preparation for a business sale or transition is paramount for a truly successful transaction for any business owner.
Planning the sale of a business should begin years in advance. Starting with the end in mind is the best advice. Pastors would agree too, that is a best practices policy for life. Usually, business planning involves benchmarking the estimated value of your enterprise. Well-written attorney-prepared buy | sell agreements have periodic business valuation requirements to set benchmark valuation precedents for owners. The purpose of business valuation as a process to assign economic value to an enterprise is to give business owners an objective estimate of value for their enterprise for whatever the intended purpose.
When your business needs a valuation estimate, whether for benchmarking value or planning a transition, there are three approaches to consider. 1) Asset-based approach. 2) Market-based approach. 3) Income-based approach. An expert business valuation will include at least two of the three valuation approaches in the valuation analysis and estimate process.
An asset-based approach adds up all the assets of the company on its balance sheet. For a going concern-based approach, where the business is to continue as an operating business this valuation calculation includes adding up all assets and subtracting liabilities. A liquidation asset-based approach is used when a business owner is looking to liquidate the assets of a business, whether at a public auction or a liquidator. Asset-based approaches usually result in greatest bargain level business value of the three approaches.
….to be continued…