The typical process of selling a business usually begins with a valuation of the company. Having clean financials is essential for the right valuation. Your valuation will dictate many different aspects of the business sale. It is impossible to begin the free business valuation process offered by many online business brokers, however, if you do not have clean financials. Let us explore the business valuation basics below.
With the technology evolving and more people spending time online than ever before, businesses have also evolved to sell using the digital platform. Online business models refer to companies that generate sales digitally.
With online business models, everything happens online – marketing, sales, value delivery, and payment. Basically, all the operations happen without face-to-face interaction. More common examples of online business models include the following:
To adapt to the online market conditions, many businesses use a combination of the above models to maximize their profit.
The basic business valuation methods for online businesses are the same as for brick-and-mortar businesses – they require a careful assessment of the financial performance, risk factors, growth prospects, market indicators, and other factors that could affect the valuation.
In the valuation, the following approaches are used:
Several businesses operate using different types of business models. For online businesses, the following models are adapted:
Financial Reports are highly important in the use of valuation approaches. This sets the groundwork for the valuation and the basis for computing the worth of the business accurately. The reports needed in the computation of the valuation are the following:
The survival of online businesses depends on the traffic it gets. With high traffic and engagement, sales have the potential to increase. Another metric used is the CAC (Customer Acquisition Cost) which measures how much in total a company spends to get new business customers.
It may be difficult to quantify intangible assets as opposed to physical assets that have historical values but they must be included in the valuation nonetheless. These include the value of content, technology, software, domain name, and reputation of the brand.
Key financial metrics will be included in the valuation such as historical financial reports, projected financial statements, and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization).
Unique businesses have more growth potential in the market and as a result, they also get a considerable market share. The growth rate of unique businesses naturally does well in their niches.
There are three different approaches used depending on the business model adopted by the company and they include the following:
The basics of valuation mentioned above serve as guidelines in business valuation. Experts use the best approach depending on the type of business to be sold.
The basic business valuation model dictates the use of important metrics in valuing the worth of the business such as the following metrics:
• Financial
• Customer
• User and Traffic
• Revenue and Growth Potential
• Assets and Intellectual Property
• Market Position
• Financial Ratios
The metrics serve as a guide for experts to value the business more accurately and comprehensively. With accurate documentation and a basis of financial information, the business will be valued more reasonably and correctly.
The basic business valuation principles include the use of the most commonly used valuation methods. Depending on the type of business, the appropriate method is also used.
Common methods of valuation used are the following:
If you are planning to sell your business, this type of valuation takes into account the value of future cash flows (typically estimated for 3-5 years) by discounting cash flow using the most appropriate discount rate.
Small businesses with a predictable and stable cash flow will benefit most from this method.
Businesses that are stable and earn consistently use this method and the value of the business here is computed based on earnings expected by the business and the market capitalization rate reflective of the risk to the business.
Businesses that possess market reports are better off using this method. The valuation is done by comparing the business to similar businesses recently sold with an adjustment made for their differences such as the size and other factors.
Through the comparison, a valuation multiple is derived.
This asset-based approach is calculated by computing the company’s net book value (Total Assets minus Total Liabilities) and is then adjusted to the fair market value. Businesses that have a high value of physical or tangible assets use this valuation method.
If a business is being sold because it is losing or about to close, the liquidation value is computed. This is based on the total selling price of the assets sold minus all the liabilities paid off.
When a business owner has not yet decided on selling the business, the value of the business is computed based on a rule of thumb, a computation that is based on common industry multiples that are derived from historical data.
To determine what the right valuation method to use is right for you, first, determine why you need the valuation, what data is available to you, and the nature of your business (service-based, real estate, online business, etc).
The basic business valuations are critical for online businesses on the verge of selling the company. Through the valuation methods used, a company will be able to benefit from it, and among them, are the following:
When a business owner has a clear understanding of how the business is valued, he or she will be able to ascertain how the sale of the business is going to operate and what the end goal of the sale is.
Probably the most important aspect of the entire business valuation process is the relationship that a business owner will have with professional valuators. They apply a basic method of business valuation but what dictates the success of the valuation is how you can communicate what you need and what your goal is.
You must be able to screen and select the valuator who can deliver the result that you need. Once you have established your objectives and selected the valuator, prepare all the needed documents and work closely during the valuation process.
Review the findings of the valuation and communicate your observations and recommendations.