How much is my business worth is the number one question all sellers want answered – unfortunately, is not always an easy answer and relies heavily on the judgment and skill of the appraiser.
Other things can also have an impact on the value of your company. Location, size, competition, growth rates, industry trends, control issues, terms of the sale, and importantly what business broker you hire.
To provide some consistency on these comparables there a few generally accepted approaches for valuing a business.
- The asset approach
- The market approach
- The income approach
Asset Approach
The Asset Approach has little to do with the market value of an operating business as it is primarily concerned with the value of business assets minus the liabilities.
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 (private sale databases). There are many databases we can research 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 business may be worth.
When most people talk of valuing a business they use the word “Multiples” but it’s important to discuss what is being multiplied – Net income? EBITDA? Owner’s benefit?
For small 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. Multiples of owner benefits typically run from less than one to about three.
For larger businesses (greater than $1m) we use EBITDA and this usually includes normalized salary and benefits package for an executive to operate your business. Multiples in these larger companies typically run from four to six
Ultimately the only person that will tell you what it’s worth is the buyer and that can be influenced by some of the things we mentioned earlier especially size, competition, growth rates, industry trends and importantly what the unique value of a business to a specific buyer at a point in time.
