OK, you’ve built your company from scratch, toughed it out through the hard times, persevered, prospered and ended up with a successful business that could provide a good, stable investment to somebody who wants to get into business.
And frankly, if you are like a lot of long-time entrepreneurs, your retirement nest egg is your company. Instead of putting more money in an IRA over the years, you bought new equipment, hired extra staff, moved to a larger building or invested in software to make your company more profitable.
Now, you’ve earned your retirement, and you’d like to sell the company. What’s it worth?
Ericka Heiser, a certified valuation analyst at Ketel Thorstenson LLP, has been answering that question for clients in the Black Hills and western South Dakota for years. KT is one of just a few companies in the area that specialize in comprehensive business valuation. She has written a series of articles in our newsletter, the KT Addition, about business valuation. The first installment is HERE.
There are three basic ways, she explains, that a business can be valued.
The MARKET APPROACH compares your company to similar enterprises that have sold recently. Depending on the type of business, this information might not be easy to obtain.
The INCOME APPROACH looks at your business’s cash flow: the margin between revenue and expenses that excludes items such as interest and depreciation. The buyer can use that information to answer this question: “Can I pay myself a reasonable wage and still make a bank payment?”
The NET ASSET APPROACH assumes there is no sweat equity, goodwill or name-recognition value. The business is only worth the value of the real estate, equipment, vehicles and inventory.
Which approach is best? It depends on the type of business, market conditions and a number of other factors. Check out Ericka’s article for more information.