BUSINESS VALUATION

How Much Is a Business Worth?

There comes a day when every business owner has the need or desire to establish a value for their business. Valuing closely held companies it is not a simple task. The complexity is further compounded because each business owner's purpose, motive, and goal in valuing their business varies significantly. No two companies are alike; therefore, no one size fits all. These issues may, and usually do, have an impact on the valuation process, give rise to the concept that the valuation process is more of an art than a science. Two businesses in the same industry with the same cash flow could be worth significantly different amounts due to trends, opportunities, geography, etc. With that said, however, it is possible to arrive at a general sense of a business's potential range of value.

There are three generally accepted approaches to valuing a company:

Asset Approach

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 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 adequately represent the value of an ongoing company with positive earnings.

Market Approach

Simply defined, it is much like 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, witch uses private sale databases. We can research many databases 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.

Income Approach

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 company may be worth.

Multiple of Your Past 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.

What Is the Multiple?

Firstly, 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. Owner's benefit equals the 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.

Okay, Now the Multiples.

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 owners benefit. Bad books, dim future, negative growth and little profits equal a low multiple. Excellent books, bright future, excellent growth 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.

Lost yet?

Here's A Summary of Business Valuation.

Your business is worth the following:

A multiple of earnings compared to like businesses (gross sales or owners benefit times an industry multiple).

A capitalization of the net profit (not owner's benefit—you cannot capitalize owner's benefit!) at 20% to 50%, or a simple multiple of owner's benefit.

If your business makes little or no money, the asset value is the only value (Goodwill + Inventory + Equipment, etc.). These assets can either be sold as a whole or liquidated over time.

How Do You Narrow the Value Down?

Call Aniss Cherkaoui

Remember, many factors can affect the value of your company, such as location, size, competition, growth rates, industry trends, quality of financial records, ease of transfer, control issues, the time you have to sell, terms of the sale, and leverage. Once again, this is an oversimplification of a very complicated subject. If you need a valuation, you should consult Aniss Cherkaoui, a valuation specialist. Now that you understand how businesses are valued, you can focus on increasing profits and maximizing your eventual profit when selling your business.