Top four Things Every Small Business Owner Should Know
As a Texas business broker based in Dallas, I get asked this business valuation question many times.
Here are four things you should know in the valuation process:
1. There are two types of valuations. One is a costly, full-blown valuation conducted by an accredited valuation specialist. Typically, these types of valuations are required in cases of divorce, partnership disputes and estate planning. More often, a trained, experienced business broker is able to conduct an accurate price opinion to structure a deal for any small business. In my practice, Whitehurst M&A, I perform complementary price opinion analyses for business owners on a regular basis.
A typical list of financials that a business owner would need to provide for a business broker to do a valuation analysis includes:
- The last three years of corporate tax returns or Schedule “C” if a sole proprietorship.
- The last three years of company financials (Profit & Loss and Balance Sheet).
- The business owner’s opinion of the current market value of the fixed assets (Furniture, Fixtures & Equipment).
- A list of owners’ perks paid for by the company for each of the past three years.
2) The business broker will review the financials and will complete what is referred to as a “recast of the financials”. The purpose of this step is to determine the owner’s discretionary cash flow, which adds back items such as depreciation and discretionary spending not necessary to running the business.
3) Using available industry resources and factoring in current market conditions, the business broker will determine the correct multiplier for the cash flow of the company. The resulting total will be the proposed sale price presented by the broker.
4) Deal structure analysis goes hand-in-hand with price analysis. For example, a buyer offering an all-cash deal will expect a significant discount off the selling price. On the other hand, a seller may receive an offer of a buy-out over an extended period of time. In both instances, the advice of an experienced broker, able to factor in the pros and cons of the terms presented by the buyer, is invaluable. The length of the note, the amount of the down payment, and other stipulations in the structure of the deal are as important as the price itself.