Not every business needs to hire a professional business valuator. For small firms with less than $1 million of SDE (Seller's Discretionary Earnings) certain rules of thumb may be applied. For example, a retail store with $600,000 of SDE might trade for $1.5 million plus inventory. What is the worth of performing a business valuation in that instance?
The properly conducted business valuation is useful to the seller for at least the following reasons:
- Identifying off balance sheet items, such as IP, which create more value than the rule of thumb metrics.
- Analyzing the supportable discretionary expenses (adjustments) that should be added back to the SDE or EBITDA.
- Establishing a negotiating position with a buyer based upon an outside, expert's opinion.
- Reflecting the importance (or lack thereof) of the owner to the near-term continued success after the purchase.
- Determining the realistic working capital needed to operate the firm, as well as any excess cash available to the seller.
- Assessing the impact of retaining the key customers offset against the risk of customer concentration.