If you own a business, there comes a moment when you ask yourself, how much do I sell my business for if I have to. Selling a business is a grand step. Whether you raised it or bought it at first, when you plan to liquidate your source of income, there’s a lot to contemplate. For starters, there’s selling price. Estimating the selling price of your business is a complicated process because not only does it comprise of business assets and income but also opportunity cost. So let’s take a deeper look at how to estimate the right selling price of your business.
Arrange 3 years financial statements
For the current financial year and previous 3, get all your financial records and statements and arrange them because you will need them soon. Income statement, cash flow statement, balance sheets will consist of all the financial details of your business to determine your overall profit or loss if any, total assets and liabilities, total transactions, all sorts of expenses and more.
Calculate your physical assets
Your tangible or physical assets such as real estate, equipment, inventory, fixtures and furnishings are all part of your tangible assets. Make a list of it and estimate the total value.
Seller's discretionary earnings statement
Your accountancy consultant will have to prepare the SDE, that is, statement of Seller’s Discretionary Earnings that includes total earning potential of your business that includes your annual discretionary earning, annual revenue, Annual Cost of Sales, Annual Expenses, Annual Net Income, Adjustments for Interest, Depreciation, Tax and Amortization deductions, Add-back for Interest paid on loans, Add-back for Depreciation, Add back for Taxes paid, Add back for Amortization, EBIDTA (Earnings before Interest, Depreciation, Taxes and Amortization), Adjustments for Personal, Discretionary and One-Time Expenses, add-back for Owner's Salary, Payroll Tax, Benefits, Add-back for Family Member Wages, Payroll Tax, Benefits, Owner/Family Personal Auto Use, Contributions/Donations, Fair-Market Rent Adjustment, Owner's Insurance premiums, Legal, Accounting, Tax services, Owner Retirement Plan contributions, Travel/Entertainment Expenses, Subscriptions and Memberships, extraordinary, one-time, non-recurring expenses reflected on Income statements and adjusted Statement of Projected Annual.
Calculate business earnings multiple
In order to acquire your earnings multiple, you need to rate your business honesty on various parameters such as Recent Performance, Ease of Transition, Financial Records, Clientele, Products, Recurring Revenue, Staffing, Location, Brand and Reputation.
Do the math
Once you have fulfilled the aforementioned steps, you can arrive at a selling price by doing some math. You may not be the best person to access your own business, so you might want to consider hiring professional business advisors who can carry out the cost estimation and calculation of business opportunity for you. Their documentation further helps in convincing your prospective buyer who is interested in buying a pre existing business.