The first step to selling your business is to establish a value and most probable sale price. Horizon Business Brokers works with business owners to help them determine how much their business is worth and what they can reasonably expect to receive when their business is listed for sale. There are several methods to value a business and we guide business owners through the most common and generally accepted business valuation practices. Whether you are looking to sell a business now or in the future, the best way to get started is to understand what your business is worth so you can obtain the highest value when you are ready to sell.
Value Your Business: In order to determine the value of a business, we need to determine two things: what a business owns and what it earns.
What a Business Owns: Tangible and intangible assets. The tangible assets are the furniture, fixtures, equipment, inventory, and real estate a business owns. The intangible assets can include the business trade name, contracts with customers, relationships with vendors and suppliers, client lists, employees, leases, licenses, policies and procedures, recipes, trademarks and patents.
What a Business Earns: What a business earns provides a certain financial benefit to the owner. The benefit generally comes in the form of business profits and a salary to the owner. It can also provide the owner with fringe benefits such as health insurance, a company car, or a retirement plan. Interest, Depreciation, and Amortization is also taken into consideration when determining what a business earns as calculated in establishing a business’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
How Value is Calculated
Owner operated businesses with sales of $1 million or less generally sell for one to three times its cash flow benefit to the owner (this is also known as SDE – Seller’s Discretionary Earnings using an adjusted EBITDA model). Each industry is different and there are many variables that can push the value of a business up or down like how long the business has been established, the owner’s day to day involvement, how dependent the business is on the owner, the age and condition of the assets the business owns, barrier of entry into the industry, and the amount of competition and market share the business has, each factor can push the value of a business up or down.
If the earnings are stable and growing, the value is on the higher end. If the earnings are variable or declining, the value is on the lower end.
Businesses with sales of $1 million to $10 million may sell for earnings multiples of three to five times its cash flow benefit. Businesses with sales of more than $10 million often have specific industry criteria, which may be applied to determine the value. At this level, Buyers may be paying for market share, rights to patents and processes, additions to product lines, or the benefits of strategic or administrative consolidation. A thorough investigation of the business’s financial information is required to uncover the true earnings capability of the business.
Rules of Thumb
Most industries have one or more rules of thumb based on Revenue or Cash Flow performance. However, they can vary widely and, in most cases, do not give an accurate value of a business. Since each business is unique, a particular rule of thumb can be off by as much as 100% or more. A professional business broker will be able to decide what the most relevant information about a business is and use the most up to date business reference guides and comp databases to then make an informed decision about its value.
Let Horizon Business Brokers help you understand the valuation process to accurately determine the value of your business to see if you can obtain your goals in a sale now or help set yourself up for a better, more profitable sale in the future. Contact us to learn more and get the valuation process started!