The Value of a Business

The Value of a Business

As the experts in buying and selling businesses, business brokers need to be masterful at answering questions that business owners have. One of the most common questions we hear from business owners is “how much is my business worth?”

This question, understandably, comes with a wide range of factors. Even businesses that are seemingly similar, can vary depending on their size, location, growth potential, and local competition. 

So, if you want to know how much your business is worth, keep reading!What is valuation? To find how much your business is worth, we first must discover the earnings of your business, consider the size and location of your business, look at your local competition, research industry trends, figure out your transition plan, calculate the growth potential, and more. As business brokers at Transworld Business Advisors of Indiana, we typically use any of the five following methods to determine the value of a business:

Multiple Discretionary Earnings Method
Income based small business valuation method which establishes the business value as a multiple of economic benefit, which is adjusted by net working capital, non-operating assets, and long-term business liabilities. The Multiple of Discretionary Earnings method establishes the business value by multiplying a seller’s discretionary cash flow by a composite valuation multiple which is figured by a number of facts about the business, market, location, and owner. 

Excess Earnings Method
The earnings come from the Seller’s Discretionary Earnings definition, but there are many different factors after that. Your manager’s salary shows up as an expense. Because of this, the calculation looks for a return on investment of capital equipment, as well as any working capital associated with running your business. All of these calculations lead to the ‘excess earnings’ number. A capitalization rate is then applied to the excess earnings to find the value of the business. 

Cash Flow Method
The Cash Flow Statement Direct Method takes all cash collections from operating activities and subtracts all of the cash disbursements from the operating activities to get the net income. If a business does not show cash flow, the deal cannot be brought to a bank. 

Done Deal Comparables Method 
Using a comparison to competitors or similar businesses to find a relative value. A company's equitable value should have a similar number to other valuable businesses in a similar class. This relative valuation technique is used to value a company by comparing that company’s valuation multiples to those of like businesses.

Underperforming Companies Method
Can you sell a company that doesn’t turn a profit? Absolutely! There is typically still value in an underperforming company. That’s because it exceeds the liquidation value of hard assets. Should you sell an underperforming business? That’s up to you! Underperforming businesses can be revived, typically by similar businesses with a lot of TLC

Ready to sell your business yet? Once you’ve picked a valuation approach with the help of a business broker, it’s time to sit down and do the math. 

Here’s what you need to have figured out to determine a sale price and find out what your business is really worth:
    -Salary and benefits information 
    -YTD Balance Sheet and P&L
    -Three years worth of P&Ls and tax returns
    -A copy of the rental lease or proof of ownership
    -Company organizational chart
    -Any special licenses or regulatory requirements
    -Equipment depreciation paperwork
    -Names, contracts, and relationship information on important clients

At Transworld Business Advisors of Indiana, we can help you determine how much your business is worth, and help you find the right buying match. Our team of brokers is led by expert investment advisor, Mike Berry. During his 30+ year career, Mike has handled broad-based mergers and acquisition executives, and has held a number of financial and operational leadership roles. 

Click here to get started calculating your businesses value.