Selling a business can be a rollercoaster of emotions. One minute you’re excited about the potential payout, the next you’re worried you won’t get what you deserve. In the end, the only way to avoid disappointment when it’s time to cash out is to know your worth and stick to it.
The Only Valuation Technique That Really Matters
When it comes to selling a business, there are a lot of metrics and valuation techniques that people use. Industry benchmarks, multiples of revenue or earnings, and the value of similar businesses are just a few examples. However, the only valuation technique that truly matters is the one you place on your business. What is it worth to you to keep it? What is all your hard work and sweat equity worth? When you’re clear on that number, you’ll ensure your satisfaction with the sale of your business.
Take Hank Goddard’s Experience as an Example
Hank Goddard, the founder of Mainspring Healthcare Solutions, provides a great example of this. When it was time to sell his business in 2016, Goddard had a clear number in mind. He had invested more than half of his career in Mainspring and wanted to get paid for his life’s work. He also wanted to ensure his original investors got a decent return on their money.
When Accruent, a company in the same industry, approached Goddard with an offer of one times revenue, he brushed it off as unworkable. Goddard had decided he wanted five times revenue for his business, even though that was a stretch for a growing software company. A year later, when Accruent came back with an offer of two times revenue, Goddard again declined. Eventually, Goddard got his number and was able to sell Mainspring for what it was worth to him.
Know Your Worth
Being clear on what your number is before entering a negotiation to sell your business can be helpful when emotions start to take over. Rather than relying on industry benchmarks or the opinions of others, the best way to ensure you’re not disappointed with the sale of your business is to decide up front what it’s worth to you. Stick to that number and don’t let anyone convince you otherwise.
Valuing Your Company for an Exit
More Than Just the Numbers Once you have a clear understanding of what your company is worth to you, it’s time to put a price tag on it. But valuing a business is not just about adding up the numbers. There are many factors that can impact the value of a company, including the stage of the business, the industry it operates in, the company’s assets, its liabilities, and the current state of the economy. So, while you can use industry benchmarks and other metrics as a starting point, it’s important to consider all the variables that may affect the value of your business.
Here are some common valuation methods to consider:
- Earnings Multiple Method: This method takes a company’s earnings and multiplies it by a multiple, which is determined by factors such as the company’s growth rate, industry trends, and the company’s historical financial performance.
- Asset-Based Valuation: This method takes the value of a company’s assets, such as its real estate, machinery, and other tangible assets, and subtracts its liabilities to arrive at the company’s net worth.
- Market Capitalization: This method takes the company’s number of outstanding shares and multiplies it by the current stock price to arrive at the company’s market value.
- DCF (Discounted Cash Flow) Method: This method calculates the present value of a company’s future cash flows, taking into account the time value of money and the company’s risk profile.