The most important question for any prospective seller is “What is my business worth?” The answers to that question depends on a number of internal and external factors.
Internal factors, or factors specific to each business, include:
- gross sales,
- industry attractiveness,
- ease of ownership,
- current business growth or decline,
- quality of customers, and
- existing management strength.
External factors, or factors that are part of the environment your business operates within, include:
- the strength of the local or regional economy,
- projections for global economy,
- commodity prices,
- the number of other similar businesses on the market,
- credit availability, and
- a host of other reasons.
How is the value of my business determined?
There most common business valuation methods are:
Market Comparables are used to value a business based on recent sales of similar businesses. This valuation model depends on having a sufficient number of similar transactions in the area for comparison.
Discounted Cash Flow
Discounted Cash Flow estimates risk factors involved with investing in a new business balanced against the projected returns the business will provide a new owner.
Multiple of Earnings
Multiple of Earnings is a common valuation model that values a business based on a multiple of adjusted earnings. Earnings are almost always normalized with Interest Payments, Taxes (EBIT) and Depreciation and Amortization (EBITDA) as the most commonly used multiples. Smaller businesses use multiples of Seller’s Discretionary Earnings to calculate an enterprise value.
Multiple of Revenue
The Multiple of Revenue model values businesses in established service sectors such as restaurants, print shops, and consulting firms.
Book Value is calculated by subtracting liabilities from current financial statements from current assets. The resulting amount is the book value of the business.
Liquidation Value is an estimate of what the assets of an underperforming or failing business can be sold for quickly in order to satisfy creditors.
Rules of Thumb
Although not a commonly used as other models to finalize a sale price of a business, Rules of Thumb are useful reality checks. Click here for some common rules of thumb for business types.
There is a saying in the venture capital industry that “the value of a business is only what someone is willing to pay for it.” In other words, the market, and your ability to attract investors and negotiate with them, will determine the value or selling price. With the help of Chinook Mergers, Acquisitions and Business Brokerage, you can rest assured that your business will be visible to the highest number of potential investors.