How much is my business worth?
If you are looking for a quick answer, this is the formula you could use to give you a rough estimate, if you have a small or medium size private business with reasonable level of sales, profitability and growth going forward:
Value = net profit x M
As example, for a business with a net profit in the range of $300K to $1.5 million, we could generally look at M as being somewhere in the range of 3 to 5. The lower the net profit, the lower the value for M; conversely, the higher the net profit, the higher the value for M. This M would be applied to the adjusted EBITDA as a proxy for net profit. EBITDA can be calculated from financial statements, and then adjusted for various items of revenue and expenses that are outside those required for the normal operation of the business. Calculating this normalized EBITDA is straight forward. The intriguing part is focusing on a value for M, as it is mostly subjective.
In order to assign a value to M, considerations need to be given to various components and aspects of the business. These typically include: assets, liabilities, working capital, growth expectations, business organization, types of products and services, market demand for those products and services, number and quality of customers, dependency on suppliers, customers, key employees, competitive environment, quality of earnings, quality of assets, how well the business stands up to the competition, obligations and intangible assets that the business may have. Those factors that have a positive influence in the earnings, affect positively the value of M. Those factors that would have a negative effect on earning, reduce the value of M.
This, of course, is a step that the Seller and his advisors go through at the time that the business is to be offered for sale. There are industry guidelines that can be used as a starting point; and, with due consideration of the various factors specific to the business, a reasonable valuation can be arrived at.
When an offer comes in, the buyer has his own criteria for valuing the business. But if you have done your analysis well, you are in a strong position for negotiating a good price.
Planning to sell your Business? … Contact me so we can go over the good points and the bad points of your business, so you can have a better appreciation of its value.