How Much Is A Business Worth? Buyers and sellers alike are primarily concerned with how a company is valued. Unfortunately, there is not one simple explanation because valuation is an art, not a science. There are multiple methods for determining the value of a business prior to sale, and we’ve outlined them below.
First, let’s look at the four different types of value that can be determined for a small business.
- Fair market value is the price a willing buyer would pay a willing seller, where both parties have reasonable knowledge of relevant facts.
- Intrinsic value is based on stock values that investors would consider.
- Fair value is based on legal standards of valuation and may be used in divorce proceedings or similar division of mutual assets circumstances.
- Investment value is specific to certain buyers and what they are willing to pay. This value can exceed the fair market value.
For the purposes of this discussion, we will examine how to arrive at the fair market value of a small business using three generally accepted approaches to business valuation.
THE ASSET APPROACH. The asset approach values the assets of a small business minus liabilities using methods like book value. These values usually do not translate to the market value of most operating businesses, therefore the asset approach does not properly represent the value of an ongoing business with positive earnings.
THE MARKET APPROACH. The market approach uses comparable sales data to determine the value of a company of a like business in size and industry. There are multiple trustworthy databases where appraisers can find multiples of gross sales and earnings to compare to a business. This method is reliable in most cases and is a strong indicator of fair market value.
THE INCOME APPROACH. The income approach determines the present value of the income stream it will bring to a buyer using several complex calculation methods. This approach is also a strong indicator of a business’s fair market value. These methods use future projections of growth to identify what the business may be worth, and oftentimes, historical earnings are a good indicator of future earnings. So essentially, in the income approach a business is worth a multiple of past earnings.
How is a Multiple Determined? In small business mergers & acquisitions, the multiple will likely be between 1-3. For larger companies, with earnings before interest, taxes, depreciation, and amortization greater than $1M, the multiple can be between 4 and 6. Multiples generally grow with business size, quality, and the verifiability of the owner’s benefit.
Remember when we said, “Valuation is an art, not a science?” That’s because all of these business valuation approaches aside, the same business can be valued differently by each buyer. And a business’s valuation is dependent on a number of factors like the location, size, competition, growth rates, industry trends, quality of books, ease of transfer, control issues, time available to sell, and the terms of the sale - and this isn’t even an all inclusive list.
If you’re thinking about a future sale, and would like to answer the question, “How much is my business worth?” Then we suggest you work with a professional business broker or transactional valuation specialist to provide you with a price opinion. As you can see, business valuation is complex, and working with a professional will ensure you understand the appropriate fair market value you can receive from the sale of your business.
To connect with a business broker schedule a free consultation, or visit our website.
Rachael Holstein has been the Marketing Manager for Transworld - Rocky Mountain since 2016. Her work experience has been largely focused on business development and marketing in business brokerage, finance, architecture, property management, and information technology. A long time resident of Cleveland, Ohio, she attained her undergrad from John Carroll University and her Master’s Degree from Cleveland State University. In 2013, she relocated to Denver with her husband, Joe, and her furry companions to explore the mile high lifestyle!