For many business owners, the business is their largest asset, so it’s normal to want to understand its value. For those of us who’ve run businesses, attaching a dollar value to the company is a delicate matter - especially if you have spent years, blood, sweat and treasure building your company from scratch.
Just like selling a house, the actual value of your business is the amount someone is willing to pay for it. Valuing a business is subjective, and two people could arrive a VERY different conclusions based upon the same set of financial information. Valuations are not straightforward and always include some subjectivity based upon market conditions, historical performance of the business and the company’s market position.
There is no "one-size-fits-all" valuation and sellers need to decide which method is right for their business based on industry, the company’s size and the circumstances of the sale. If you’re asking yourself “How much is my business worth?” this article will help you understand the various valuation methods in plain English.
Asset valuations are relatively straightforward. The final valuation is the value of the company’s tangible and intangible assets reduced by the company’s debt. This is a common method of valuing distressed businesses or liquidations where the value the company’s cash and other assets (as if they were sold) is reduced by the company’s debt. Asset-based valuations often times are the lowest because they exclude the value of the company's earnings potential and goodwill.
Earnings valuations are often used to value to a healthy business. This method looks at past performance to estimate the company's value by converting future earnings into current dollars (e.g. net present value) and return on investment (ROI). This is also a relatively simple method to compare different businesses in different industries or locations. However, even this method is imperfect. Although valuation is based on the company’s historical financial performance, the calculation requires earnings to be precisely calculated and agreed to by the buyer and the seller. Anyone who has bought or sold a house or anything on eBay can attest to the fact that buyers and sellers seldom agree on a price. A simple way to address this issue is to create a Market Valuation and compare your company to similar businesses that have sold in your industry.
Market valuations estimate the company’s value by comparing it to similar businesses or “comparables”) that have sold. A reasonable number of comparable that have sold recently and in the same industry must exist to use this method with confidence. For example, a small taxi company cannot base its value off of Uber, just as an internet startup cannot base its value off of Proctor & Gamble price to earnings. Finding comparables for private companies is difficult. You can definitely do your own research and general sense for your business’s value. For example, visit BizBuySell.com or BizQuest.com to find similar companies that have sold and their selling price. If you’re working with an advisor, they’ll should provide you with comparables and a list of recent sales in your industry.
From an investor’s perspective, historical profitability and defensible earnings potential are the most attractive qualities in a company. Years of profit and positive cash flow will make your company stand out amongst the crowd.
If you’re thinking of selling your business, don’t be afraid to contact us if you would like preliminary comparables with no commitment and complete confidentiality. We provide comps to potential investments and enjoy helping fellow entrepreneurs.
If you would like the help of a qualified business appraiser to value their companies. A good appraiser, with a proven track record in your industry, can significantly shorten the sale process and ensure that your business is priced appropriately. Consider independent firms like; BKD, Crowe, EKS&H or Intrinsic Valuation.