Mergers and acquisitions (M&A) experts report the most important step in marketing any business is properly valuing that business before taking any other steps. To determine a business’s value, several aspects of the business must be considered.
Financial Statements Must Be in Order
No prospective investor will consider purchasing a business without having an accurate set of financial statements in hand. Anyone wondering how to sell a business must explore several marketing strategies with M&A experts, but proper financial paperwork will certainly be a vital component.
The next question anyone exploring ways to sell a business will ask is what financial information is necessary? There are four forms virtually all M&A experts suggest as being vitally important.
- An accurate income statement: Potential buyers want an honest picture of expenses and income to determine if the business is, indeed, viable.
- Balance sheets: Properly constructed balance sheets detail the value of all assets held by the seller. In addition, a detailed explanation of the business’s liabilities must also be included to provide an accurate picture of the shareholders’ equity.
- Adjusted EBITDA (for larger businesses), Seller’s discretionary earning statements, and Owner’s cash flow are all related, though certainly not identical, terms. In most cases, buyers will want to see at least two or three years of these statements, as they provide a proxy of what cash flow a new owner can expect to see.
- A cash flow statement: Cash flow statements provide potential buyers with a better idea of the true cash coming from a company’s operations, changes in equipment expenditures and investments, and how the company is financing itself. Cash flow statements are most necessary when a business keeps their financial statements on an accrual basis.
Since every industry and every state is somewhat different, mergers and acquisitions professionals will, when necessary, suggest other information also be made available that helps potential buyers better understand the finances of a business for sale.
Evaluate All Tangible Assets
Tangible assets help determine a baseline asking price for a struggling business, though many owners selling a business don’t have a realistic idea of their marketable assets in these types of transactions. Tangible assets include inventory, equipment, fixtures, and other property. Again, the nature of assets will vary depending on the type of business, so it pays to work with mergers and acquisitions professionals to determine what can and needs to be included.
Intangible Assets Also Have Value
When determining how to sell a business, it’s just as important to consider the value of intangible assets. Businesses frequently own copyrights, trademarks, and patents that have value. Goodwill, customer lists, and similar assets also add value to the business. How the tangible and intangible assets provide value or how the cash flow of a business determines value is where an experienced M&A advisor or business broker can help.
Exploring the Competition
When selling a business, competition matters. Too much competition in a given industry can reduce the value of a business for sale but, conversely, sparse competition can increase values. Since markets evolve, it’s also important to understand where an industry is headed, as any business for sale in an expanding market will demand a higher price than one in a declining segment.
When looking for strategies to sell your business, M&A professionals should always be consulted. Because every business is unique, those experts will take the time to explore all valuation techniques before developing a marketing proposal. If you’re considering selling your business, call or email CGK today to schedule a consultation, or visit our website for more details. You’ll be glad you did.