The Importance on Business Valuation

A common myth among many businesses is that they ought to know their company’s valuation only when they are looking to sell it. And this is where the businesses end up getting less than what they desire in terms of results. Many a time, business owners are too late in realizing the importance of valuing their business. This is quite common among small and medium-sized businesses. This leads to a procrastination in hiring a professional to complete the process of completing a valuation. The delay in starting the business evaluation will have little to no chance to increase the value of your company before a defining moment. The defining moment could be the seeking of investment or it can be the addition of a new owner to even selling your company.

Here are some things you need to know when looking to sell your company.

Documents Needed for a Business Valuation?

The documents needed for a business valuation are as follows:?

• Financial Statements (Balance Sheet, Profit & Loss Statement) (Important)?
• Account payable and Account receivable with aging report?
• Tax Returns (Important)?
• Pending litigation if any (Important)?
• Investments?
• Corporate bylaws, article of incorporation, board meeting minutes, stock ledger?
• Business plans?
• Lease(s)?
• List of Intellectual Capital?
• Business Forecasts and Projections
• Business Plans and Organization Documents (if available)
• Payroll?
• Loan documents
• Fixed asset with depreciation?
• Inventory reports ?

How to Understand a Business Valuation?

The process of valuing a business is not easy unless perhaps one is an accountant or a natural numbers person. In order to conduct an accurate valuation, there are a few definitions to understand first.?

Seller’s Discretionary Earnings

Seller’s discretionary earnings, or SDE, is similar to EBITDA. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This is essentially the pure net proft of a business.

Business owners calculate SDE to determine the true value of the business for a new owner, similar to what EBITDA does. SDE will include certain expenses such as the income one reports to the IRS and non-cash expenses. All the revenue the business brings in is included, basically. However, unlike EBITDA, the evaluator will also add in the owner’s salary and benefits into the SDE calculation. Typically, large businesses will use EBITDA calculations to value their businesses while small businesses will use SDE. This is because small business owners usually expense personal benefits.

It is important that potential buyers understand SDE, not only business owners. This is because it is likely that a business owner will provide a number for the buyer. It is critical that the buyer understand how the owner arrived at that value, as well as what those numbers say about the business.

To calculate a business’ SDE, one should start with the pretax, pre-interest earnings. After, one will add back any purchases that are not considered essential to operations. These might include vehicles and travel, which will be reported as business expenses. Employee outings, one-time-purchases, charitable donations, and the owner’s salary will all be included in the SDE.