Source | LinkedIn : By Jac Gallagher
When you’re busy running a business, an exit strategy is probably the last thing on your mind. Most people tend to put it off until they are close to retirement, winding up or needing a change.
But have you ever asked yourself this question:
“If something unfortunate happens to me tomorrow, how much would I get from selling my business?”
See, you don’t have to wait until it’s time to sell your business to think about this. Anything can happen in life so you should always be prepared. It is also considered good practice to value your business from time to time so you can plan your retirement properly.
Valuing your business
It goes without saying that you want to get the highest valuation for your business. In order to do so, you need to get your finances in shape and all your records in order. You also need to know all the important numbers that buyers are interested to know.
Having the right numbers could make or break a deal. It will also determine how sellable your business is to potential buyers. Remember, buyers will also do their due diligence on your business before making an offer. If you have something to hide or have not kept your records in order, you may lose a potential buyer.
Below are just a few examples of the data you need to have ready.
1. Basic numbers
If you can’t produce the basic figures easily, you are in big trouble. They can be obtained from your financial reports. Do you know what is your cost of goods sold (COGS) or operating cost? What is your annual profit or loss after tax? Which line of product or service is the most profitable? And which is the most cost effective?
2. Key financial ratios
Ratios indicate how healthy a business is. They can measure a number of things including profitability, liquidity, cost and leverage. For profitability, examples of important ratios are your gross and net profit margin and return on equity ratio. For liquidity, you need to know your current ratio, which measures how much cash you have to cover short term liabilities.
You should also compare your ratios with industry averages to see how you stack up in the industry.
There are a million and one ratios you can measure. Calculating them should be a simple job.
3. Assets, Liabilities and Equity
How much are your tangible assets worth? Do you know what your intangible assets are? Do you have a detailed asset schedule in place? What are your short and long term liabilities? These questions are easily addressed from checking your latest balance sheet.