How much
is my business worth & how do I value it? Big and important questions for sure.
Here is the breakdown of the most popular methods used to value a business. I find the biggest obstacle of selling a
business is the owner having unrealistic expectations of the value - especially if the business is not systemized and cannot be run without the owner present.
Other than just valuation methods, some other key drivers are accounted for:
How systemized the business is
Is there a written strategy to grow
Marketing in place, measuring results etc.
These are just a few and it is important to look into more to ensure buyers will have confidence in the busines
s going forward.
MULTIPLE OF EBITA/SDE (
Sellers Discretionary Earnings)
This method uses a company’s current profits to identify its future earning potential. It is important to normalize the financials first in order to get an accurate EBITA/SDE. A review of the industry is then taken into place and a multiple of this number is then calculated for the selling price. An EBITA of say $500,000 x 3 = selling price of $1,500,000. This is the most popul
ar selling valuation.
MULTIPLE OF REVENUE
Multiple of Revenue is the method of valuing a company as a multiple of its aggregate annual sales. If a company’s Enterprise Value/ Revenue multiple is 1.5x revenue and generates $1 million in annual revenue, it is worth $1.5 million based on this approach. Not as possible as most buyers are focused on profits.
DISCOUNTED CASH FLOW
This valuation method d
etermines a company’s value based on the present value of future cash flows. The future cash flows are discounted based on the company’s weighted average cost of capital. This method can be complicated and takes into account the time value of money -bird in the hand is worth two in the bush sort of calculation.
MARKET VALUE VALUATIONS
Is a subjective analysis of other companies in the market that are similar. Buyers look at similar business and usually price your business on a similar one that sold and will likely not pay more. Works well in a model like a franchise.
ASSET BASED
Mostly used with business that have heavy assets like a trucking company. Many times this is used when the company will cease operations. It does not take into account the "going concern" of the business -simply what revenue are those assets generating?
Those are the most popular methods of valuing a business.. There are other more complicated ways and many facets come into play when valuing a business for sale. One such area is putting a number to the goodwill the business. Tricky but an item on your financials that may truly effect the overall sale price of your business
Hope that gives you a bit o
f an insight into to how to effectively valuate your business for sale.
Bradley A. Crompton