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 an average small and medium size private business with reasonable level of sales, profitability and growth going forward:
Value = net profit x M
One could generally look at M as being somewhere between 3 and 5. This would be applied to adjusted EBITDA as a proxy for net profit. EBITDA can be calculated from financial statements; that’s the easy part. The difficult part is focusing on a value for M.
In order to assign a value to M, considerations need to be given to various components of the business. These typically include the following: 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, competitive environment, quality of earnings, quality of assets, how well the business stands up to the competition, and other 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 tend to have a negative effect on earning affect negatively the value of M.
Notwithstanding the estimated valuation, the selling price may end up being quite different. Excluding accounting adjustments, there are factors dealing with the individual circumstances of the Buyer and the Seller that have a bearing on the actual sale price. Remember valuation is estimated based on the parties acting reasonably, and without undue influence. The terms of the sale may also have significant effect on the price.
And then, there are exceptions. The business may own certain assets that have inherent value beyond what EBITDA calculations might imply. It takes the right Buyer who can make effective use of those assets. There are also businesses that have little or no value; and, may not be salable.
If this all sounds like a cloud of smoke, and you are planning to sell your business, contact me, and I will help you see through the smoke.
Keep in mind that what really counts is the price and terms that the Buyer and the Seller agree to.