Before you even think about selling, make sure you know that magic number
Most investors are well-versed in the basics of valuing a publically-traded company, but ask them to value a privately held business and you'll likely have them scratching their heads.
This is because a private business hasn’t gone through the grueling process of an initial public offering (IPO)—the value of its shares isn’t listed for the world to see on a particular stock exchange. That said, it’s still possible to find a private business’ market value—you just have to know where to look.
It’s best to establish an understanding of your business value earlier rather than later, ideally in the first stages of succession planning. This knowledge is not only a key factor affecting the timing and viability of succession, but it is also required for tax, estate and insurance planning purposes.
Most important, working through a valuation exercise helps to identify the value drivers and detractors of the business. Below are some areas to consider when performing this exercise. These indicators are consequently significant value drivers for a business:
A business that shows stable or growing cash flow trends, supported by consistent profit margins, is typically more attractive to potential buyers.
If you’re a leader in your industry, with a strong reputation, recognizable brand and advanced technology, your value will be much higher than a similar business that has merely maintained the status quo—or been sidelined with an excessive number of lawsuits, for instance.