If you are a business owner contemplating selling your company, chances are your first question is "How much is my business worth?" This logical inquiry into a company's worth is the number one concern of most of our sellers and is of the utmost importance to any qualified potential buyer. So how should you go about finding out the true valuation of your company when preparing for a sale?
Unfortunately, there is no ONE easy answer, as there are several different options for a business owner to choose from when researching the valuation of their company.
Transworld Business Advisors is here to help business owners and potential buyers navigate the web of options and understand all of the elements that play into a business's Fair Market Value. Fair Market Value is essentially what a qualified buyer would pay for a business in an open market. In most cases, small business sales do not require an (oftentimes extremely expensive) appraisal done by a firm. Therefore, Transworld's methods are typically satisfactory to determine a small businesses most appropriate sale price.
Most small business trade at a multiple of cash flow (SDE), and occasionally gross revenue. Cash flow is defined as ownership's total compensation package. This number can include net profit, owner salary, health benefits, and non-cash expenses like depreciation and amortization. Once we have determined cash flow, a multiplier is applied to that number to calculate an estimated sales price. This multiplier is based on your industry, past sales in your area, and qualitative factors such as management structure, length in business, and competitive advantages.
We know this is complicated, so let's work through an example together.
"Transworld Bar & Grill" did $1,000,000 in sales last year (2014). The net profit of the company was $50,000 and the owner paid himself $50,000 plus a health care benefit of $3,500. Because the bar is an equipment-heavy business, the owner also took a depreciation write-off of $10,000. All other expenses were normal and essential to business operations.
In this case, the cash flow is $113,500 (net profit + salary + health + depreciation). Most restaurants sell for between one and three times cash flow based on past sales history. So the estimated fair market value of this business is between $113,500 and $340,500. In order to determine a more precise value, we would have to learn more about the company.
Cash flow is just one of many factors that need to be considered in the value calculation, others could include management/employees in place, length in business, market position, barriers to entry, and much more that will also have a large impact.
If you have additional questions about this article or are still wondering what your business is worth please do not hesitate to contact us. We can complete a Market Price Opinion of your business within one week.