As a business owner, you might have a general idea of your company’s value. However, if you’re considering selling a business in the near future (or passing it down to the next generation), you need a current, reliable company valuation.
When you first started your company, you likely consulted an attorney for help with business planning. If you’re planning a business sale, the right attorney can help you secure a Denton business valuation, too.
At Hunter Sargent, PLLC, we’ve focused on business and estate planning for generations. If you’re creating a succession plan or getting ready to sell, we can help.
What Is Business Valuation?
Business valuation is the independent and unbiased process of estimating a company’s value. Business valuation services will delve into a company’s history, cash flow, assets, liabilities, and other factors to get a complete picture of what it’s worth.
Although some business owners may believe they have a good general sense of their company’s value, it’s wise to seek out a professional appraisal practice before selling a business or passing it down to a family member.
Why Business Valuation Matters in Denton
If you’re wondering, “How can I sell my business?” valuation in Denton is a good first step. When you have an accurate idea of how much your business is worth, you can set an appropriate price and decide how much you’re willing to negotiate.
Many people associate a Denton business valuation with selling a company. However, there are several other reasons you might need to determine your company’s precise value:
- Reporting to investors
- Asking for seed money
- Solving shareholder disputes
- Dividing property in a divorce
- Being merged with (or acquired by) another company
- Performing succession planning
Getting a business valuation is about more than just putting a dollar sign on your company. It can also give you a clear idea of where you can optimize your business to build revenue and ultimately increase your company’s worth.
The Value of Professional Business Valuation Services
Many people who are wondering how to value a business for sale in Texas will stumble upon online business valuation calculators and use those to generate an estimate. There’s nothing wrong with using an online calculator to get a general idea of your company’s worth. However, professional Denton, TX, business valuation services will give you a valuation that’s far more precise.
Why does this matter? If you want to generate as much profit as possible from the sale, you need to know how to price your business.
If you set your asking price too low, you could be cheating yourself out of thousands of dollars. If you set the price too high, your business may generate little to no interest. The more accurate your business valuation is, the better equipped you’ll be to set a reasonable asking price.
The Role of Local Business Brokers in Denton
Before you start looking for potential buyers, you need to seek out a Denton, TX, business appraisal. It’s important to look for a professional business broker in your area if you want a highly accurate valuation.
Business valuations don’t take place in a vacuum. Your company’s key features (like cash flow, assets, liabilities, and revenue projections) can play a role in determining its value. However, local market conditions matter, too.
Business brokers are especially adept at business valuations because they work within the local market daily. They understand market trends, and they have a feel for what buyers want (and don’t want) in a business.
Business Valuation Methods Explained
There’s no singular method for conducting business valuation for small businesses in Texas. Business appraisers often use multiple methods to create a precise estimate.
Appraisers will generally use their professional judgment to decide which strategies to use, but these are a few common valuation methods:
Discounted Cash Flow (DCF) Method
The discounted cash flow (DCF) method of valuation estimates a company’s economic value by calculating its future cash flow and then discounting that cash flow back to today’s dollars.
Business brokers use a complex formula to calculate business worth based on DCF. However, the concept is a simple one. If the value of the future cash flow is greater than the initial investment (the purchase price), a buyer will likely think it’s worth investing in.
Book Value
The book value method (also called the net asset value method) estimates a company’s value by subtracting its liabilities from its assets. Although this method gives you the company’s value as reflected in its books, it’s often an underestimate of the true value.
This is because the only business assets taken into consideration are tangible ones. Realistically, the right buyer will also care about intangible assets (like the knowledge and dedication of the management team, brand recognition, etc.)
Times-Revenue Method
Business brokers sometimes use this method when valuing new companies that don’t have a long earnings history. The times-revenue method involves taking the company’s earnings over a set period of time and multiplying them by an industry-specific multiple.
Because it relies on past earnings data, the times-revenue method isn’t as precise as some of the other methods for determining business worth. This method gives you a rough estimate, so most business owners use it as a starting point for negotiations rather than an absolute selling price.
Cash Flow: The Core of Your Business Valuation
An accurate Denton business valuation takes many factors into account. However, your company’s cash flow is one of the most critical pieces of information buyers look at in a business sale.
But what makes cash flow so important? For many investors and entrepreneurs, your cash flow is a quick indicator of a company’s overall financial health. A business with a steady cash flow can easily do the following:
- Invest in further growth
- Survive periods of economic uncertainty
- Cover all of its expenses
As you saw above, many popular methods of business valuation center on a company’s cash flow.
This doesn’t mean that you’ll be unable to sell a business with uneven cash flow. For instance, if you have a seasonal business, buyers in your industry won’t expect cash flow to be perfectly even throughout the year.
Key Factors That Influence Valuation in Denton
When you consult local business valuation experts in Denton, they’ll look closely at your company to give you the most accurate value estimate possible. These are some of the main factors that affect business valuation:
Your Industry (and Your Business’s Position Within It)
Selling a business is easier in some industries than in others. If you’re in a growing sector (like tech), you might have an easier time finding a buyer than someone in a more niche industry (like animal training).
The valuation process will also consider how your business is positioned within your industry. For example, if you have a software company that lags behind competitors, it may have a low fair market value even though the tech sector is popular.
Revenue Forecast
Buyers don’t want to pour money into a company just to lose it. If your company’s revenue projections indicate a likely increase, your company’s valuation will be higher than if you were expecting a decrease in revenue.
Assets and Liabilities
Even if your business appraiser isn’t using the book value/net asset value method of valuation, your company’s overall assets and liabilities will impact its valuation.
Generally, the greater the ratio of assets to liabilities, the greater your business valuation will be.
Employees and Management
It’s easy for business owners to focus on financials when trying to estimate their company’s value. Cash flow and other financial metrics are important, but any thorough Denton business valuation will also take your employees and management into account.
For instance, if most of your management team has been with you for years and you have a low employee turnover rate, that’s a good sign for buyers. However, if your company is reliant on one or two key employees, that’s cause for concern.
Possible Risks
Even if your company is highly profitable now, the presence of risk can lower its valuation. For example, if a very small group of customers accounts for 30% of your annual sales, that level of concentration is a risk to you (and anyone who buys your business).
Common Mistakes in Business Valuation
Many business owners underestimate the importance of an accurate business valuation. If you’re preparing to sell your business, take care to avoid these common valuation mistakes:
Waiting Until the Last Minute
Some business owners don’t seek a valuation until right before the company sells. Waiting this long presents two problems:
- There may not be enough time to choose a competent business valuation professional
- The valuation professional may not have enough time to put together an accurate valuation
When it comes to selling a business, nothing should be done hastily.
Not Choosing a Qualified Valuation Professional
Not everyone who offers business valuation services has the knowledge and experience needed to deliver a quality valuation. Look for professionals certified by the American Society of Appraisers (ASA), National Association of Certified Valuators and Analysts (NACVA), or other reputable organizations.
Using Inaccurate or Unverifiable Data
A business valuation is only as good as the data it’s based on. Before seeking the help of a business valuation professional, review your books for accuracy and completeness.
Not Updating the Valuation
Don’t make the mistake of treating a business valuation as a one-time event. The valuation captures your company’s worth at a particular point in time, and it’s important to regularly update it, especially if your company is on the market.
Buyers will want to see a recent valuation, and showing them an outdated one may make it look like you have something to hide.
Preparing Your Denton Business for Sale or Succession
Most business owners understand that it’s important to get an objective estimate of their company’s value before selling. However, you might wonder why business valuation matters for succession planning.
Even if you aren’t selling your business to a family member, getting a valuation before the transfer has several advantages:
- It gives the new owner a clear picture of the company’s financial health
- It allows for planning to reduce the taxes that come with business transfers
- If multiple family members will have ownership stakes, it allows shares to be fairly distributed
If you’re just beginning business succession planning in Texas or are considering selling a business soon, taking the following steps may help you attract qualified buyers or ensure a smooth transition from one generation to the next:
Decide Who You Want to Take Over Your Business
This step is important regardless of whether you’re passing your company down to a family member or selling to new investors. If you’re building a succession plan, identify who you think would best serve the company’s specific needs as a leader.
If you’re preparing for a sale, think about the kind of person you want to sell your business to. Do you want your company to be acquired by a larger business? Or would you prefer to sell to another owner-operator? Asking yourself these important questions can help you prepare your sales strategy.
Assemble Your Team
A business sale is a complex process, but you don’t have to handle it alone. Before you start, gather a group of trusted advisors:
- Business Broker: Values and markets the business
- Attorney: Helps structure the deal and navigate taxes
- Wealth Manager: Helps you decide how to use proceeds from the sale
Don’t be afraid to take your time selecting your advisors. When sellers have the help of knowledgeable professionals, they’re far more likely to command a respectable sale price.
Get Your Financials in Order
During the due diligence phase, serious buyers will need to closely examine your company’s financial data. Don’t underestimate the importance of good organization. Even if your company is highly profitable, disorganized financial records are a signal to buyers that your company may be disorganized in other areas, too.
Find and Address Inefficiencies
The ideal time to sell a business is when revenue is increasing, and one of the best ways to boost revenue is to locate and remedy inefficiencies.
For example, if your retail business deals with frequent stockouts, investing in a real-time inventory management system might boost your sales.
The Role of a Lawyer in Business Succession Planning
Determining the value of a business is often more complicated than it looks. The experienced business lawyers at Hunter Sargent, PLLC, have connected countless clients with capable business appraisers.
However, that’s just a fraction of what we do. Our team understands the challenges that come with business succession planning in Denton, TX, and we can help you create a plan for passing your business down when it’s time.
If you’re looking for help selling a business or creating a succession plan, call us or get in touch online to book your initial consultation.
