Balancing Act

From time to time, we work with clients who are considering selling their business. Ultimately the question that comes up is:

How much is my business worth?

To be certain there are many factors that go into placing a valuation on a business.

The best recommendation I have for business owners is to analyze the value using a few methods to create a range of valuation. This will give you better information and will allow you to understand the valuation from a buyer’s perspective. I will detail a few methods here, but ultimately there is one principle that you should always keep in mind.
The true value of a business for sale is determined by what a buyer will pay.

I have seen many a business owner obtain a valuation for their business and then miss out on a sale opportunity because the buyers just were not there at the price and terms the owner was demanding. It is easy to think that your business is worth more than a buyer will. After all, you have put your heart and soul into your business and this is your baby.

Okay, so now for some good stuff!

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One common method for valuation is looking at a percentage of gross sales. Depending on your industry and market place you will come up with an appropriate % of annual gross sales and this will provide a value for your business.

Another common method used is a multiple of net income. Again you will need to determine what the appropriate multiple is in your region and industry but many buyers look at the annual net income a business is able to produce and then are willing to pay a multiple of that net income. So if the multiple is 2 and your net income is $100k then the valuation using that method is $200k.

A 3rd method is the monthly sales multiplier. This is basically an assessment of the business’es monthly sales multiplied over a period of months. The number of months used will vary from business to business but buyers will often look at this method as a way to place a value on the sales production of the business. Keep in mind that monthly sales tend to be gross figures so this may give a high valuation of the business if overhead is high.

Finally the last method that I will talk about here is the Fair Market Value of Assets + a percentage of gross sales.

In this exercise, the task is look at the inventory on hand along with the fixed assets that the business owns and place a FMV on those items. In addition to the assets, you will assign a % of gross annual sales and add that to the value of the property to arrive at a valuation.

To be certain, there are many other factors to consider such as real estate, market conditions, etc., but these are a few ways to calculate what you business might be worth. When I work with my clients, I will typically look at all of the appropriate methods to find the outliers and to determine a range of value for a particular business.

One final piece of advice; you should consider employing a certified valuation specialist. The methods given above are not inclusive and there are many factors to consider in any valuation. Give me a call and I would be happy to refer you to a certified valuation expert.

We help clients improve their overall value to make their business more attractive to buyers.

If I can be of any assistance, please do not hesitate to contact me at (203) 404-3974 or drop me a line at jrosen@rospro.com.

Be well!