How Do You Price A Business You Want To Sell?
Get expert tips on how to price your business for sale. Explore asset-based, earning value, and market value methods, especially tailored for Utah’s legal landscape.
How Do You Price A Business You Want To Sell?
If you’re considering selling your business, one of the first and most crucial steps is determining its price. Getting this right can make the difference between a swift sale and a prolonged, frustrating experience. But how do you price a business you want to sell? This comprehensive guide explores the fundamentals you’ll need to know, especially within the context of Utah’s specific legal landscape.
Understanding the Basics of Business Valuation
Business valuation is both an art and a science. It involves estimating the economic value of an owner’s interest in a business. Common methods include asset-based approaches, earning value approaches, and market value approaches. Your choice will depend on the nature of your business, the industry’s competitive landscape, and the current market conditions.
Asset-Based Valuation
This approach involves summing up the parts of the business’s value. Essentially, you add up the total value of the business’s assets and subtract its liabilities. For example, in Utah, if you’re selling a manufacturing company, the value of machinery, inventory, and property would be considered.
In Utah, businesses can operate as corporations or limited liability companies (LLCs). According to Utah Code §48–3a-404, LLCs must keep adequate records of their assets and liabilities. Accurate record-keeping is not just a good practice — it’s required by law.
Earning Value Approach
The earning value approach focuses on the business’s ability to produce wealth in the future. This could involve analyzing past earnings and projecting future profits. Common models include the Discounted Cash Flow (DCF) method where future earnings are predicted and discounted back to present value.
For example, consider a tech startup based in Salt Lake City. The earning potential might be high, but liquidity can be a challenge. This is where the DCF model becomes crucial. This method is especially beneficial under Utah’s legal framework because the courts often rely on projected future earnings when resolving business disputes.
Market Value Approach
The market value approach involves comparing your business to similar ones recently sold in your area. This could be particularly effective if you’re running a retail business in Provo or a restaurant in Park City, where market conditions can be relatively steady and comparable.
Under Utah Code §16–10a-1103, corporations must provide records of shareholder transactions. Keeping these records can help substantiate your market-based valuation, aiding prospective buyers in understanding the valuation’s legitimacy.
The Legal Framework in Utah
In Utah, selling a business entails navigating several legal requirements, from business structure considerations to specific regional laws. Whether you’re selling an LLC or a corporation, understanding these legal intricacies is essential.
Regulations for Corporations
Corporations in Utah must adhere to a range of legal statutes, including maintaining proper records and ensuring transparency. According to Utah Code §16–10a-1601, corporations are required to keep complete and accurate records, which include books of accounts, minutes, and share ownership details.
Imagine owning a corporation in Ogden. You’d be obligated to maintain meticulous records of all transactions and corporate minutes, which not only aids in valuation but also helps in the smooth transfer of ownership.
Rules for Limited Liability Companies (LLCs)
For LLCs, Utah Code §48–3a-408 mandates proper record-keeping, which includes maintaining a list of members, financial statements, and annual reports. Imagine running an LLC in St. George. Not only would you need to maintain these records, but you’d also need to ensure they are readily accessible to members who request them.
Business Succession Laws
Succession planning is another critical facet of selling your business. Utah’s statutes provide guidelines to help with this transition. According to Utah Code §75–2–804, it’s crucial to have an effective succession plan, notably when a business is passed through a will or trust.
Real-World Example: The Smith Family Business
The Smith family in Weber County decided to sell their business after 20 years of operation. They planned to pass the business down to their son, but without a clear succession plan, complications arose. Utilizing Utah Code §75–2–804, they consulted with attorney Jeremy Eveland to draft a comprehensive succession plan, ensuring a seamless transition and accurate business valuation.
Factors Affecting Business Valuation
Achieving an accurate valuation involves considering both tangible and intangible factors. Your business’s location in Utah can also have a significant impact.
Tangible Assets
Tangible assets are physical objects like equipment, inventory, and real estate. If you own a manufacturing unit in Tooele County, the machinery and property will considerably affect your business’s price.
Intangible Assets
Intangible assets include brand reputation, customer relationships, and intellectual property. For instance, if your business is a software company in Lehi, your proprietary algorithms and client base could significantly boost your valuation.
Common Misconceptions About Business Valuation
Valuation myths can lead you astray. Let’s debunk some common misconceptions.
“Only Profitable Businesses Have High Value”
A profitable business usually fetches a good price, but even businesses that are not currently profitable can have high value due to their assets or potential growth. For example, a Salt Lake City startup might not be profitable yet but could have substantial intellectual property that adds significant value.
“Valuation Is A Once-And-Done Task”
Valuation should be an ongoing exercise. Business environments change, and so does your business’s worth. Revisiting valuation periodically helps you stay prepared for opportunities or challenges, like those posed by economic shifts in Utah County.
“I Don’t Need Professional Help”
The process of valuing and selling a business is complex and laden with legal nuances. Hiring a professional like attorney Jeremy Eveland ensures you’re navigating Utah’s legal landscape correctly, thereby securing a better deal.
Practical Steps to Sell Your Business
Understanding how to value your business is the first step, but what comes next? Let’s explore the practical steps involved in selling your business.
Prepare Financial Statements
Maintain up-to-date financial records. Accurate profit and loss statements, balance sheets, and tax returns attract potential buyers. For instance, in Salt Lake County, having well-organized financials helps demonstrate the business’s financial health, accelerating the sale process.
Consult Professionals
Engage a business broker, accountant, and attorney. Professionals like Jeremy Eveland, who specialize in business succession law, can guide you through legal requirements, ensuring you comply with Utah laws.
Create a Business Prospectus
Develop a comprehensive document that includes your business model, financials, market analysis, and value proposition. A detailed prospectus reassures potential buyers and facilitates a smoother transaction.
Market Your Business
List your business on relevant platforms, advertise in industry publications, and network within local chambers of commerce. For example, advertising via the Sandy Chamber of Commerce can expose your offer to a broader audience within Utah.
Negotiate and Close the Deal
Once you’ve found a buyer, negotiate the terms carefully. Ensure all legal documents are reviewed by your attorney to protect your interests. Follow Utah laws for the official transfer of ownership to avoid any legal pitfalls.
Real-World Scenario: Closing the Deal in Davis County
Consider Jane, who runs a profitable restaurant in Davis County. Upon deciding to sell, she consulted Jeremy Eveland for legal guidance. They prepared all necessary documents, ensuring alignment with Utah Code §70A-2–201 on formal requirements and helped her secure a lucrative deal.
Common Pitfalls and How to Avoid Them
Valuing and selling a business comes with its own set of challenges and potential pitfalls. Here are some to watch out for and tips on how to avoid them.
Overestimating Value
An inflated price can deter potential buyers. Base your valuation on solid data and consult professionals to avoid inflating the price.
Neglecting Legal Compliance
Failing to adhere to local laws, like keeping proper records as stipulated in Utah Code §48–3a-408, can complicate the sale. Ensuring you comprehend and comply with all legal requirements is crucial.
Ignoring Tax Implications
Understand the tax implications of selling your business. Consult a tax advisor to plan for capital gains tax and other obligations under Utah tax laws.
Why Understanding Business Law Matters
Understanding business laws is not just about compliance; it’s also about protecting your assets and interests.
Protecting Your Rights
Knowing Utah’s business laws ensures you’re protecting your legal rights. For example, understanding Utah Code §16–10a-1103 about shareholders’ records can help defend your position during a sale.
Resolving Disputes
An in-depth knowledge of relevant statutes can aid in resolving disputes. Understanding Utah’s legal framework ensures you’re prepared for any legal challenges that may arise during the sale process.
Regulating Activities
Adhering to business regulations ensures smooth operations, enhancing your business’s attractiveness to potential buyers. For example, compliance with local zoning laws in West Valley City ensures your business operations will continue seamlessly post-sale.
Addressing Concerns and Questions
It’s natural to have questions and concerns when selling your business in Utah. Here are answers to some common queries.
How Long Does It Take to Sell a Business?
The time frame can vary based on the business type, market conditions, and thoroughness of your preparation. On average, it can take anywhere from 6 to 12 months.
What Are Closing Costs?
Closing costs include fees for lawyers, brokers, and any costs associated with transferring licenses or permits. These vary based on the complexity of the sale and services required.
Can I Sell a Business With Outstanding Liabilities?
Yes, but you need to disclose all liabilities to the buyer. These liabilities can affect the valuation and terms of the sale.
What Happens to Employees?
Employee contracts and obligations typically transfer to the new owner. However, this can vary, so it’s essential to consult with a legal professional.
Final Thoughts
Pricing a business for sale involves a blend of valuation methods, legal compliance, and strategic planning. By understanding the legal framework specific to Utah and consulting with a professional like attorney Jeremy Eveland, you can ensure a smooth, profitable sale.
Engaging in thorough preparation and staying informed about Utah’s specific business laws will not only protect your interests but also provide a transparent and attractive proposition for potential buyers.
To show your appreciation for this detailed guide, please clap the article, leave a comment, and subscribe to your Medium newsletter for updates. And if you’re ready to take the next step in selling your business, speak with a lawyer by calling attorney Jeremy Eveland.
Jeremy Eveland
8833 S Redwood Rd
West Jordan, Utah 84088
(801) 613–1472
The information contained in this article is for informational purposes only and is not legal advice. For legal advice, hire a competent lawyer in your jurisdiction.
