Determining the Value of a Business – Get it Right from the Beginning
If you have ever watched the popular MSNBC show The Shark Tank, you have witnessed the Sharks grilling the participants on the valuations that they have placed on their businesses. In the real world of business transfers/sales, business owners can expect the same type of scrutiny. In a previous post we wrote about four questions that all Sellers must be prepared to answer, with one of them being where in the heck did you come up with that price?
Much to the chagrin of many business owners, businesses are valued on how much revenue they generate and not on the business’ potential, longevity, intangible assets, etc. The type of revenue used in the business valuation calculation can vary from annual sales, gross profit, net income, and others. We believe that for main street businesses (those with a value of $2M or less), the most reliable revenue figure to use is Discretionary Earnings (DE)[1]. Once this figure is calculated, we determine the value by identifying multiples of the selected revenue figures by accessing various sold comparison data bases and applying the multiple to the revenue figure.
This multiple is a function of a number of factors, which include the industry, the size of the business (top line sales, DE, etc.), risk, owner reliance, customer/supplier concentration issues, etc. Another thing to keep in mind is that the Buyer is also going to gauge their decision making on whether or not the DE will pay them a reasonable salary to support them and their family, pay principle and interest on debt service, and provide a reasonable return on their down payment. All of these, and other items, will contribute to the pricing. Even after all of this work and effort, a company is only worth what someone is willing to pay for it.
In most cases, when businesses are not priced within this framework, buyers will seldom give the business a second look and the business will not sell. This is supported by a recent International Business Brokers Association survey where brokers stated that one of the top reason’s businesses did not sell was due to unrealistic price expectations of sellers.
Since your business is likely the most valuable asset in your portfolio, and the sale of this asset will determine your future financial independence, don’t take the chance of going to market without knowing what your business is REALLY worth. Your future financial well-being will depend on it.
[1] https://www.ibba.org/resource-center/glossary/ The earnings of a business enterprise prior to the following items: income taxes, non-operating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business. Seller’s Discretionary Earnings (SDE)and Seller’s Discretionary Cash Flow (SDCF) and Adjusted Net are other terms used.
One of the Most Active Business Brokerage Firms in Florida VR Business Sales has been the leader in the business brokerage industry for over forty years and consists of approximately 50 independently owned and operated offices worldwide. VR Business Sales located in Tampa/Apollo Beach was founded in 2012 and offers VR’s exceptional brokerage services to the Central Florida market. We represent a wide variety of business owners operating within a wide range of industry segments. Our office and intermediaries consistently rank within the Top 10 in the VR network. Call us at 813-260-3127 to arrange a no cost and no obligation meeting.
