When thinking about “How to sell my business in California”, the first step in preparing to sell your business is to seek out a seller’s business valuation. This guide will delve into seller business valuations for California businesses. Then, we will explore using a business valuation to prepare to sell your business and develop an exit strategy for a future sale of your California business.
The Importance of Seller Business Valuations in California
Why An Accurate Valuation Matters for Sellers
An accurate business valuation, sometimes referred to as a broker’s opinion of value, is the essential first step in preparing to sell your business for maximum value in California. The business valuation will provide the business owner with realistic expectations for cash at closing for planning purposes but also immensely affects the speed at which your business will sell. An overvalued business deters buyers because they will feel the seller has an inflated expectation or ego as to the value of the business while an undervalued business will instill concerns in a buyer that there are red flags or problems buried somewhere that need to be revealed. Thus, seeking out an accurate seller business valuation in California from a professional, licensed, California business broker before listing your business for sale will assist with expectations and efficiency for the overall transaction. Note, that Pacific Business Sales provides a business valuation at no charge to aid in your planning.
Preparing for Your Business Valuation
Key Documents and Financial Statements Required
The following is a list of the basic documents you should expect to provide when obtaining a seller business valuation in California. These documents ensure that the business is accurately valued according to industry business valuation methodologies used by SBA lenders and business valuation analysts:
- 3 Years of Tax Returns
- 3 Years of Profit and Loss Statements
- The most recent year-end balance sheet
- The most recent month-end balance sheet
- Information as to your present lease (or if you own your building, the present market lease rate)
- Accounts Receivable and Accounts Payable Reports
- Most recent year-end balance sheet and most recent month-end balance sheet
A business broker will also request information as to your owners’ benefits. Such information will include:
- Owner’s Salary
- Owner’s Health Benefits paid by the company
- Owner’s vehicles paid for by the company
- Family member’s salaries and roles in the company (if any)
- Owner’s 401(k), life insurance, pension expenses paid by the company
- other owner’s benefits and expenses on the P&L and tax return
The information provided by the above documents and expenses allows a business broker to develop an accurate picture of the potential market value of a business and is the first step in the listing process.
Pacific Business Sales, following the signature of a Non-Disclosure Agreement, can send you a secure portal with questions to guide you through securely uploading the required documents for developing your market valuation.
A Beginner’s Guide to Seller Business Valuation Methods in California
A Market Valuation Report is a comprehensive document. It contains a report of various business valuation methodologies that few business owners are familiar with. Below we will briefly describe the lender-approved and most commonly used methods of market valuation: asset approach, market approach, and income approach.
A Business Broker understands when each approach is applicable, and to what degree it is applied, based on the market, type of business, and size of business. Each method derives its own business value result and the resulting values are usually weighted by relevance. The market value report should be explained by your business broker so you are aware how the business value was determined.
Asset Approach
The asset approach considers a company’s net asset value. The Asset Approach is rately used and is only useful in specific circumstances.
Essentially, the Asset Approach subtracts total liabilities from the total assets. This sometimes differs from what is seen on the company’s balance sheet as the book value of assets and should consider intangible assets (for example, goodwill) may or may not be included.
This approach is typically applied to holding companies, capital-heavy companies, and/or companies with continuous losses. A business broker will not generally use this method as the businesses requiring this approach are typically looking for liquidation. A profitable and successful growing or stable company will be valued by utilizing the market approach and/or income approach.
Market Approach
The market approach is what most people are familiar with. The overarching premise of the market approach is determining the fair market value of the business based on similar recent transactions (comparable transactions).
A business broker will narrow the comparable transactions to your industry based upon the NAICS Code and other factors such as revenue, what percentage of earnings the discretionary earnings constitute, and ruling out outlier transactions. It is important your business broker carefully analyzes the comparable and does not applying a “rule of thumb” or industry average multiple without the underlying comparable data. Earnings multiples vary significantly by industry and by the size of the company.
Income Approach – Discounted Cash Flow Method
The income approach often uses the discounted cash flow method. The underlying premise is that the value of a business is equal to the present value of its projected future benefits (including the present value of its terminal value). This valuation models growth revenues and expenses over a period based upon the elements of projected future cash flow, a discount rate, and terminal value.
The projected cash flow is based upon a forecast of cash flow, typically between 3-10 years, based on historical and projected performance.
The discount rate is based upon risk factors such as, but not limited to, customer concentration, industry risk, quality of financials, and owner dependency.
The terminal value uses a terminal growth rate, the discount rate, and the final year of cash flow to arrive at the value, which is then discounted and added to the cash flow projection.
The income approach is an excellent cross-check to the market approach and both business values should be relatively close.
The Role of a Business Broker in Business Valuation in California to Sell My Business
Utilizing the market approach and the income approach, a business broker will evaluate the extent to which each of these methods apply the market value of your business and weight the results accordingly. A business broker understands how each of these methods needs to be adjusted and tuned to apply to your specific business. Accurate analysis of the data provided by these methods is crucial to fine-tuning a listing price that is both realistic and accomplishes the seller’s exit goals.
An Orange County business broker, such as Pacific Business Sales, can apply the above to the market trends in Orange County to ensure that you are achieving the maximum value the market provides. Pacific Business Sales understands buyer negotiation trends so that the listing price is set at one that reflects the present market environment when you decide “It’s time to sell my business in Orange County or California.”
Case Studies: Successful Business Sales Following a Business Valuation in California
Pacific Business Sales thrives in selling businesses in California, particularly Orange County, Los Angeles, and the Bay Area.
For example, a construction company contacted Pacific Business Sales to discuss the sale of his construction company. Following a discussion of the valuation and the Seller’s goals/cash needs, Pacific Business Sales assisted with setting revenue and discretionary earnings targets for the Seller to hit over the next 3 years. Based on his discussion with Pacific Business Sales, the owner had a clear understanding of what expenses would help and hurt his value and was able to drive his business forward more efficiently and with his target value in mind. The company ended up exceeding those goals and the seller was able to sell his business and receive his desired cash at closing.
The above is a typical scenario demonstrating how a seller’s business valuation in California can assist a business owner with achieving their goals for a successful business sale in California.
Conclusion
As demonstrated above, engaging a business broker in California who understands the intricacies of valuation is crucial to meeting your exit goals for your business. Pacific Business Sales can assist you in the preparation of the market valuation so that you can confidently exit your business knowing you got the maximum value.
Frequently Asked Questions
When Should I Obtain a Business Valuation to Sell My Business in Orange County?
Pacific Business Sales will provide business owners a valuation as early as 5 years prior to the planned sale of their business and then update that valuation each year so that you can make sure you are meeting your goals.
Pacific Business Sales can project the effect of increased revenue and earnings on value to assist you with coming up with a plan.
Of course, if you are interested in selling your business in the near term, we can develop a market valuation for you within approximately two weeks of obtaining your information.
How Can My Business Broker work with my Financial Advisor and CPA to Prepare to Sell My Business in Orange County?
A professional business broker can work in conjunction with your financial advisor and CPA to prepare your business for sale.
By securing a valuation 3-5 years in advance of your sale, Pacific Business Sales can work with your team of advisors who can make sure that your financial records reflect the financial picture of your business in a way that enhances the value of your business. Often, if an owner’s benefit expense is blended into a category that a lender will not count as an addback (such as marketing or office expenses), your value will be discounted by that amount. Therefore, having these discussions early can ensure that your owner’s benefits expenses are documented in a way that may be added back to the value of your business.
Further, Pacific Business Sales can provide market value reports to your financial planners and tax advisors so that your advisors are aware of what the likely type of transaction your business will be (stock or asset) and what cash you will receive at closing. Financial planners and tax advisors may be able to plan on deploying a tax deferral strategy to lessen the tax impact of the transaction in the year of closing.
