Selling Your Business: Circumstances That Impact Valuation

To ensure a smooth and successful sale of your business, you must first develop a comprehensive business exit strategy. Knowing the present value of your business is essential for making informed decisions about its future. A business valuation provides valuable insights into the current state and worth of your business, which can help you make informed decisions about exit planning, pre-sale enhancements, and sale timing. Until the time of a sale offering, business valuation will be adjusted to account for a variety of changing conditions that may occur while you are in the process of selling your business.

Circumstances That Alter the Business Valuation

While it typically takes between six and 12 months to sell a business, the actual timeframe can vary significantly, depending on a number of factors. While your business is on the market, there are unique circumstances that may alter your business valuation. They are:

• Changes affecting your business sector and market area may affect the value of your business and the price a buyer might be willing to pay for it.
• Changes altering economic conditions may affect your sales volume and profit margins, also affecting the annual earnings upon which multiple-of-earning valuations are based.
• Departure of key personnel or major clients, or other major business changes, may affect business value and attractiveness.

Conditions That Impact the Asking Price

In addition to adjustments to business valuation, there are additional conditions that may impact the asking price. Some of the conditions that may result in adjusting the asking price are:

• If the sale offering includes seller financing – the seller’s willingness to accept a portion of the purchase price in payments that are not due until a defined point in the future – the attractiveness of the sale offering increases. Some studies show that by offering seller financing, the earnings multiple used in the price calculation can increase by as much as a third, resulting in higher business value.
• Because business buyers negotiate downward from the business asking price, sale pricing is often set at 10-15 percent over valuation to account for the effect of buyer negotiation.

Business valuation estimates are adjusted prior to sale pricing to account for a variety of circumstances. Valuations are adjusted to account for changes in the business sector, economic conditions, and changes in business staffing and clientele. As a result, it’s not uncommon to see adjustments in the asking prices while your business is on the market. From financing terms that include seller financing to buyer negotiations, expect the asking price to fluctuate in response to the unique considerations in the market. Having a business broker or M&A advisor on your team to help you understand the fluctuations in valuation and asking price is invaluable when selling your business. Visit the BizQuest Broker Directory to find a professional to help sell your business.