At Transworld, our business valuation experts can help you determine the value of your business. We can meet with you and discuss your business' worth for listing or we can be engaged to perform valuation reports as needed. Contact us to schedule a confidential and free consultation today to get started with a business broker, and find out what your business is worth.
Valuation is the number one question of our sellers when contemplating a sale, and of course, the concern of most buyers when purchasing a company. Unfortunately, there is not an easy answer, and, more confusing, there are probably several answers. Why? Because business valuation is an art not a science. Valuations are subject to the appraiser's judgment, skill, and quality of methodology. There are several standards of value for businesses, i.e., different values.
Hear Transworld discuss these concepts in person on episode 4 of the Deal Board Podcast.
For our purposes, let's talk about fair market value, which is essentially what a buyer would pay for your company in an open market.
Now, remember, this is a simplification of some very intricate valuation practices. There are valuation experts that specialize in providing very complicated reports as part of their business valuation services. Those reports are often used for IRS inquiries, legal proceedings, intricate financing, and other reasons. A full valuation of a company could cost $10,000-$30,000. For small business sales, a full valuation is usually not needed. And for the most part, our simplified valuation methods are sufficient enough to determine your listing value and approximate your eventual sale price.
There are three generally accepted approaches to valuing a company:
The asset approach values the assets of your business minus the liabilities. Some of the methods in this approach are book value, excess earnings method, and the asset accumulation method to name a few. However these values usually mean very little to the market value of most operating businesses. For the most part, the asset approach does not properly represent the value of an ongoing business that has positive earnings.
Simply defined, this method is similar to a real estate comparable method. Like businesses in size and industry sell for similar valuations. There is the guideline publicly traded company method or the merger and acquired company method (private sale databases). There are many databases we can research to find multiples of gross sales and earnings to compare to your business. This method can be very reliable in most cases and is a strong indicator of value.
Your business is worth the present value of the income stream it will bring to an investor. There are several complicated methods including the discounted future earnings method as well as several capitalization methods. This approach is also a strong indicator of what a business with positive income is worth. These methods rely on future projections and growth rates to decide what the business may be worth. If that is true, then why do most people multiply or capitalize historical earnings to arrive at a value? Because the assumption is the buyer will maintain the current income levels and they are a reasonable indication of future earnings.
Whew? What does all that mean? Simple. Your business is worth a multiple of your past earnings, if a buyer can project those earnings will be maintained after the purchase.
Well, first, we must discuss what you want to multiply? Net income? EBITDA? Owner's benefit? In small business sales (businesses earning less than 1 million dollars), we use owner's benefit. The owner's benefit equals net income, plus depreciation, interest, and the owner's salary, and fringe benefits. In other words, all the income available to ONE owner if the company was debt free. EBITDA is used by larger businesses and includes normalized salary and benefit package for an executive to operate your business.
Well, the multiples of owner benefit can run from less than one to about three. If your company is larger and your EBITDA is near or above one million, the multiples can run from four to six. Is this set in stone? NO! How do you know which multiple would be used for your business? Well, the multiple will rise along with the size, quality, and verifiability of your owner's benefit. Bad books, dim future, negative growth, and little profits equal a low multiple. Excellent books, bright future, excellent growth and you will garner a high multiple.
Can all that mean nothing? Yes!
Buyers determine a business's eventual sale price. Not valuation experts. That is why no one can tell you exactly what your business is worth. Not your banker, CPA, lawyer, broker, or mother-in-law. The only individual that will tell you what it is worth is the eventual buyer - and that will be a subjective evaluation. The same business will be valued differently by every buyer.
Your business is worth the following:
A multiple of earnings compared to like businesses (gross sales or owner's benefit times an industry multiple).
A capitalization of the net profit (Not Owner's Benefit...you cannot capitalize owner's benefit!) 20% to 50% or a simple multiple of owner's benefit.
And if your business makes little or no money, then asset value is the only value. (Goodwill + Inventory + Equipment +etc.) Either sold as a whole or liquidated over time.
Call an expert in business transactions - call Transworld Business Advisors!
Remember, many other things can affect the value of your company. Location, size, competition, growth rates, industry trends, quality of books, ease of transfer, control issues, time you have to sell, terms of the sale, so leverage the business broker you hire.
Once again, this is an over simplification of a very complicated subject. If you need a valuation, you should consult Transworld, a valuation specialist, or someone familiar with business sales. Now that you know how businesses are valued, perhaps you can concentrate on increasing profits and your eventual profit in your business sale.