The Valuation of a Business
SETTING THE PRICE AND TERMS
The most frequently asked questions in the Business Sales and Mergers and Acquisitions Industry are:
• How sell-able is my business given my circumstances?
• How can I achieve the maximum selling price?
• What is the true and accurate value of my business?
• What terms will I have to consider and how do they affect my asking price?
Let's address the subject of valuation so you can be better prepared as your time to sell draws near. Although there are multiple methods to determine worth, there are three popular methods used to determine a selling price. Let's look at the three individually and remember that the final asking price will weigh all three of these along with several other factors.
Multiple of Earnings
Here a multiple of the cash flow of the business is used to calculate value. Generally using your SDE (Seller's Discretionary Earnings) as a measure of profitability, you'll take that annual figure of profit and add back any discretionary expenditures. For instance, factor your salary as the owner, any depreciation or interest expense, back into the business profit. Your broker will then use this total discretionary cash flow as a tool to gauge a selling price based on a multiplier for your industry.
Market Based Comparison
Utilizing data from recent sales of a similar business that has sold, and adjusting for obvious differences. Business are as unique as their owners and often times your business model, location, or reputation will be difficult to match. The comparable market method will help provide a reality check as you take into account all data from the various valuation methods.
Assets of the business factor into the determination of a final selling price. Tangible assets such as property, fixtures, equipment, inventory, etc. along with intangible assets like good will, brand, and position in the market and tenure in the market all combine to help build that final sales figure.
"Selling your business is a tough decision and a lengthy process. The first step is to establish its value. Even if you are not planning on selling today, it makes good sense to know where you stand...so you know where you are headed."