Most Importantly, you need to know what your business is worth before you should sell it. So, we will provide an Opinion of Value that will give you the price range you can expect from the sale of your business.
Because every business is different, the variables used for determining value will almost always be different. For instance, let’s create a hypothetical scenario. Let’s say that Company “A” and Company “B” have exactly the same financial information; the same gross sales, the same net profits and the same cash-flow. However, Company “A’s” largest customer is 15% of their total sales and Company “B’s” largest customer is 95% of their total sales. So, do you think this might affect value? More than likely. Do you think that each deal might be structured differently? It’s very possible.
During the transactional process, there will typically be differing perspectives of what the “Value” of a business should be. In other words, you have the “Seller’s Perspective” of value, the “Buyer’s Perspective” of value and the “Lender’s Perspective” of value. Therefore, having the ability and experience to recognize and pull these differing perspectives together is critically important because it can truly be the difference between getting the deal done or having a deal completely fall apart.
There are several methods used to determine the value of a business. For example, some will argue that a business valuation is a subjective process, which is many times true. (“Do I use 2 times multiple, or 4 times multiple?”). Therefore, because of this, it is recommended that you use multiple valuation methods and then compare the findings. If four different methods keep coming up with similar numbers, you know that your value is in the ballpark. Some methods that are commonly used include:
Income Capitalization:
Future income is calculated based upon historical data and a variety of assumptions.
Income Multiple:
The net income (profit/owner’s benefit/seller’s cash flow) of a business is subject to a certain multiple to arrive at a selling price.
Rules of Thumb:
The selling price of other “like” businesses is used as a multiple of cash flow or a percentage of revenue.
Liquidation Value:
Determines the value of the company’s assets if it were forced to sell all of them in a short period of time (usually less than 12 months).
Many business owners will strive to show a smaller net profit in order to lessen their tax burden. Numerous expenses such as: Depreciation, interest, excessive officer salaries, 1-time expenses, personal expenses, and more can be added back to the bottom line. As a result, this will help strengthen the overall cash-flow and value of the business.
One of the more common ways to calculate value is to use a multiple of cash-flow. But, how do you determine the multiple? 2 times? 4 times? This is where things can be viewed as somewhat subjective. After all, the ideal multiplier can oftentimes be determined by differing perspectives of sellers and buyers. For example, one buyer might be content with a 10% return on a well-established “safe” investment. However, another buyer might not accept anything below a 25% return on their investment because of a potentially high-risk factor. For instance, including the inventory in the sales price versus adding it to the sales price can also affect the multiplier, as well.
