If You Want To Sell Your Business: Enterprise Value Will Give You An Estimate Of What It Is Likely Worth To A Buyer.
With no sense of enterprise value, how will you know whether any offer you receive is a good one? Keep in mind that good used in this sense may be different from your initial view of a good offer. If you want $10 for something, and someone offers $11 you would view that offer as being good. However this example ignores any measure of intrinsic value.
Someone trying to sell a $5 bill for $7, would only consider an offer of $7 or above to be a good one. However, in reality, any offer exceeding $5 is a good one. That's because the value of a $5 bill is $5. The example is overly simplistic, as I am sure no one would try this unless the $5 bill was some type of collectors item. And in that case the enterprise value would be higher than the intrinsic value or face value of the $5 bill.
This is not intended to say that your expectations are not important. But you need to know the expectations of prospective buyers. And they are more likely to be guided by a measure of enterprise value than by your expectations.
Their measure of enterprise value will be based on a cursory business valuation. They will do a quick examination of your financial information, and apply some multiple they are comfortable with to arrive at a quick estimate. They will likely be flexible and move from that position, based on tangible arguments.
Their measure may be based on a multiple of cash flow, that they feel is appropriate. Or in the case of some businesses, they may apply a multiple of gross revenue to arrive at enterprise value. They know this is only an estimate, as a real valuation is much more comprehensive. It will take industry standards, regional differences, current interest rates, current capital availability, revenue and cash flow predictability, and a variety of other things into account.
At some time as you prepare your business for sale, you will need to have a professional valuation done. But for now, as you are doing your initial preparation and thinking, you just need an estimate. Consult the library, or reputable on line sources to learn how to do this if you don't know.
Determine what cash flow multiple most closely applies to your business and current circumstances. Apply it as directed to get your own informed estimate of value. That will give you a starting point. If you feel that it misses the mark by miles, you need to revisit differentiating based on excellence. If you have made, or can make a strong case for excellence in several areas, then you will likely find that the valuation done professionally will exceed your estimate.
However, if you can't demonstrate excellence in one or more tangible ways, and you don't like your estimate of enterprise value, you have two choices. Either you adjust your expectations so you are not too unhappy with your estimate. Or you need to start work immediately to build differentiable excellence.
One important thing to keep in mind as you work with doing an estimate of enterprise value, and doing what you can to improve it. The simplistic cash flow multiple estimate method is just that. It is a simplistic representation of a much more complex and sophisticated process. And at its core is having confidence in projections for future cash flow. Confidence is the key.
The multiple can be expanded when all parties can agree that they can see further into the future, and with greater confidence. That is why I have placed such great emphasis on developing differentiable excellence in the form of proven systems and processes. They will help you demonstrate that your future visibility is greater, and that a prospective buyer can share your confidence in longer term, future cash flow projections.
The thoughts you need to take away from this discussion are that it is helpful. You can do an estimate of it yourself. If you are not happy with the results of the estimate, you can do something to improve the underlying business so that a professional will come up with a more acceptable valuation.
You may want to dig deeper into enterprise value, business valuations, and the importance of confidence in future cash flow projections. Go to your local public library and borrow a book on the subject. Ask your accounting firm to recommend a book and buy it.
You may wish to return from
Systemize Your Business
. You may also wish to review
How To Value A Business
, return to
Prepare Your Business For Sale