How to Determine a Valuation and Get Paid When Selling Your Business in Michigan

If you’re considering a sale of your business, it’s important to understand what its value is. Knowing the value of your business will help you set a realistic price and ensure you get the best deal possible.

Too often, business owners start contemplating a sale with unrealistic assumptions about what their business is worth. Business valuation is not something that a business owner should take lightly, or base on incomplete information, because when there are mismatched expectations between an owner and prospective buyers, it makes it nearly impossible to get a deal done.

It’s important to get professional assistance to determine the value of your business, which requires a process that involves both art and science, and is based on both macroeconomic factors and factors specific to your business.

Here are some tips to help you value your company for a sale.

1. Analyze Your Financials

The first step in valuing your company is to analyze your financials. Look at your income statements, balance sheets, and cash flow statements to get an accurate picture of your company’s financial health. This will help you determine the value of your business based on its current performance.

2. Assess Your Assets

In addition to analyzing your financials, you should also consider the value of your assets. This includes any physical assets such as equipment, inventory, and real estate. You should also consider any intangible assets such as intellectual property, customer lists, and brand recognition.

3. Research the Market

It’s also important to research the market to get an idea of what similar businesses are selling for. Look at recent sales of similar businesses in your industry to get an idea of what buyers are willing to pay. For example, while high-growth tech startups may be selling at some large multiple of current revenue, don’t assume your manufacturing or services business will command the same sort of valuation. Know the market. This will help you set a realistic price for your business.

4. Work with a Professional

To help ensure you come up with an accurate valuation, it’s a good idea to hire a professional. A business valuation expert can help you determine the fair market value of your business and provide you with an accurate assessment of its worth. If you’re starting a sale process, you’ll likely be hiring an experienced business lawyer to guide you through it, and your lawyer should be able to advise you on who to hire to help conduct a valuation.

How to Structure the Sale of a Business and Get Paid

When a business is being sold, the buyer and seller have the option to structure the transaction as either an asset acquisition or a stock sale.

The sale of a business as a going concern to a new owner is done via a stock sale. In a stock sale, the purchaser buys the stock of the company and assumes all assets and liabilities. In short, the stock sale purchaser steps into the shoes of the prior owner(s).

In an asset sale, the business’ assets, such as equipment, property, customer lists, and goodwill is sold. The purchaser then uses the assets for an existing business or operates under a new entity using the purchased assets. The purchaser does not assume the liabilities of the seller unless specifically agreed upon.

There are pros and cons to each approach which you should discuss with your business lawyer. Either method can work well, but it depends on the parties’ objectives and the deal’s circumstances.

Once a deal structure has been agreed upon, the parties must decide the manner in which the purchase price will be paid to the seller. Here are some of the most common and effective ways to get paid for selling your business.

1. Immediate Cash Payment

The most common way to get paid for selling a business is to receive a cash payment. This is usually done through a lump sum payment or a series of payments over time. The amount of cash you receive will depend on the size and value of your business.

2. Stock in the Buyer’s Business

Although not common in transactions involving the sale of a small to mid-sized privately held company in some instances, the purchaser of a company will want to pay the seller in whole or in part with the stock of the purchaser. From the perspective of the seller, the value of the stock it is being paid is dependent in a large part upon the financial strength of the purchaser and whether the shares of the purchaser are privately held or traded on a public stock exchange. A seller is typically more likely to accept stock as consideration when shares are publicly traded because their value is easier to determine and the shares trade in a liquid market.

3. Earn-Out

An earn-out is a payment structure where the buyer pays the seller a certain amount of money upfront and then pays additional money based on the future performance of the business. This can be a great way to get paid for selling a business if you’re confident in the future success of the company. However, in many deals involving an earn-out, the seller/owner is required to continue working at the company for a certain amount of time to ensure a successful transition of the business.

4. Combination of Cash/Stock/Earn-Out

Many transactions involve a combination of cash, stock, and/or earn-out consideration.

There are many facets to selling a business. Determining the right valuation for your business, and structuring a transaction in a way that’s a win-win for buyer and seller, are two of the most important. That’s why it’s critical to think through the right approach with an experienced business attorney. To discuss your objectives, and further understand your options, please contact Zana Tomich.