Quantitative analysis is core of economic applications which is employed for measurement of performance of an economic activity, and evaluation or valuation of financial institutions. The monetarily prediction of real-world events enable you to acquire or strike off your company. All businesses around the globe present their annual reports to the stake holders. These annual reports inform the stakeholder about performance of firm and enable them to make a rational decision. We will talk about these reports in detail but pricing a business for sale is more than just numbers.
Business people are setting up their businesses available to be purchased for different reasons. Entrepreneurs always seek opportunities in global markets to exploit them for profits. You primary concern, when you strike off your company is the worth of business. In most cases entrepreneurs estimate the worth of their business high. But after reading this article you will be able to understand basic parameters to evaluate your business. We will start our discussion with fundamental tool for assessment of a business, the periodic reports or financial statements
1: Financial Statements
Throughout the business span, it is obligatory to maintain business records. There is a long list of benefits of keeping a clear and comprehensive record and especially when you want to strike off your company, it is the right time to straighten up and analyze your financial statements. Entrepreneur at small level are advised to maintain at least three years record for legal purpose. Big firms and corporations prepare systematic financial statements in proper order. Having a spotless and efficient financial record can give you competitive advantage when your potential acquirers are keen on making an agreement. Entrepreneurs are familiar with basic types of financial statement. In order to give the brief idea of statement, following is a brief description of financial records
Income statement: It shows gross revenue made by business in an accounting period. Result of an income statement shows net profit or net loss made by business entity.
Cash flow statement: Shows how much money transactions are made by business. It differentiates the cash inflows and outflows and change in most liquid asset i.e. cash.
Balance sheet: The most important financial statement represents the position of a business by following basic accounting equation. All tangible and intangible assets owned by your business must equate with liabilities (external and internal) of the company owes.
Statement of retained earnings (SRE): Shows the net wealth increase or decrease made by business for its owners. It provides a detailed distribution of wealth among the owners of a company.
Comparison analysis of performance based on these statements has its limitations as it varies industry to industry, Size of organizations, seasonal variations and many other factors pose as challenge to draw theoretical conclusion while striking off your company. It is important to consider other factors as
2: Estimate the Value of Tangible and intangible Assets
Business assets can be classified into tangible and intangible assets. Physical or tangible assets are considered real assets for the company. Tangible assets mainly include cash, land, inventory, equipment, furnishings, and fixtures. Intangible assets, on the other hand, include brand worth, positioning, and customer loyalty. The price of each item of these assets enables the business purchasers a full resource posting including price tag and current market rates. The buyers always make a cost and benefit analysis on the basis of these postings. Entrepreneurs should also understand the liquidity period of these assets which represents the time for assets exchange to benefits which are a lot quicker sold or purchased.
3: Seller’s Discretionary Earnings Statement (SDE)
When you strike off your company, the seller’s discretionary income provides an accurate measure of performance. In exit strategies of large businesses, SDE provides performance appraisal by enabling the managers to reach a rational decision by considering the sale expenses. It helps the buyers to calculate return on investment by providing annual income derived by the business. Before calculating SDE, it is important for entrepreneurs to understand the basic difference between SDE and earnings before interest, taxes, depreciation, and amortization (EBITDA).
SDE = Adjusted EBITDA + Owner Compensation
The following table provides the calculation of SDE
|EBTIDA or pretax earnings||xxx|
|Add: Non-operating expenses and||xxx|
|Subtract: Non-operating income.||(xxx)|
|Add: unusual or single time expenses||xxx|
|Add depreciation and amortization expenses.||xxx|
|Add interest expense||xxx|
|Subtract interest income.||(xxx)|
|Add salary of owner||xxx|
|Add salaries and miscellaneous expenses (donations, payroll. Benefits, travel expenses of staff, subscription)||xxx|
The primary goal of the SDI number is to understand the real value of the business being sold. It provides the basis for business sale price as it represents the full earning capacity of the business for the year. It is helpful for the buyer too as it provides a comprehensive risk assessment of the firm.
4: Get the Earnings Multiple
Businesses are always expected to grow. The growth rate of a business is also an indicator of the sale price while striking off your company. The SDE as described above provides a number for assessment but the earning multiple provides the future expectation for the buyers. It commonly ranges from one to four. An Earnings multiple provides future prospects, for example for current earning of 50,000 with earnings multiple of business is 1.5 means the next year expected earnings of 75000.
5. Valuation scale
We have discussed the fundamental accounting method as well as the advanced tools for the valuation of the business. For a comprehensive exit strategy, it is also necessary to present the valuation on the scale other than the numbers. It adds to the attraction of the business being sold. The following table shows a rating scale that provides an attractive assessment for buyers and sellers of the business. You can use this table while you strike off your company.
|Matrices||Rating 1 very low to 5 being highest|
|Subjective Performance||1 2 3 4 5|
|Smoothness in transition process(Legal matters)||1 2 3 4 5|
|Financial management of business||1 2 3 4 5|
|Corporate Social Responsibility (CSR)||1 2 3 4 5|
|Business offerings||1 2 3 4 5|
|Revenue streams||1 2 3 4 5|
|Human resources||1 2 3 4 5|
|Physical presence (location, supply chain)||1 2 3 4 5|
|Intangible assets (Brand, patents, customer loyalty)||1 2 3 4 5|
If you fill this chart for the assessment of your company right now you can easily judge the worth of business from a buyer perspective. Numbers provide a rational approach towards the pricing decision of your company but this scale provides a subjective tool to measure the worth of business. Sales may decline due to recessions but the behavioral and cognitive variables like brand loyalty, or buying behavior of customers also play a vital role in business worth.
6: Building price perception
After reading this article you are now able to assess your business worth and attractiveness from a different perspective. Your asking price can be a starting point for the buyer to negotiate downward. Assuming the right price to strike off your company the price should be attractive to capture the buyer’s attention.
7: Comparison analysis
The final stage of pricing the business is a comprehensive comparative analysis of your offerings and prices with the businesses in the same niche. Business’ strengths and weaknesses enable it to gauge the competitive advantage. You can hire a dedicated broker or assistant to guide you through the reports of businesses in your niche and market analysis. Hire yourself a business broker to see if your asking price corresponds with the recent business for sale.