How much is my business is worth?
It is the most frequently asked questions from our sellers considering the sale of their businesses. The answer is not simple. Many variables and factors drive and influence the value of a business. The final number on valuation reports can drastically change depending on the appraiser’s expertise, experience, and knowledge. Valuation is not just science but a form of art. It can only be done precisely by a highly trained valuation expert with years of transactional experience in the sale of businesses. Also, business valuation in Dallas may not necessarily have the same result from a business valuation done for a company in another location, provided financials for both companies are the same. The appraiser should consider and weigh various regional and local factors so that both the business valuation in Dallas and another location should have an accurate result.
Understandably, all business owners want the highest price possible for their business, which can sometimes lead to unrealistic expectations of the marketplace. For the most successful and profitable transaction, a business must come to a Fair Market Value (FMV)—the price at which a business would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have a reasonable knowledge of the relevant facts.
Our Goal
Our ultimate goal is to achieve the highest and best possible price and terms and close the deal in the least amount of time by providing our clients with a transparent and realistic snapshot of the marketplace. The number one reason why a business does not sell is an unrealistic, overpriced valuation. Only by coming to the most optimum Fair Market Value (FMV), we can achieve our goals in a competitive open market.
Comprehensive Market Analysis
Valuation is not only based on numbers. Before thoroughly analyzing the financials of a company, the valuation process begins with a comprehensive market analysis of the following factors:
Business Growth
Business Type
Industry Outlook
Competition
Location/Facilities
Marketability
Historical Earnings
Income Risk
Bankability
Operations
Valuation Methods
Asset Approach
This method is most commonly used when the earnings of a company are not sufficient to offset the risk of staying in business. Instead of factoring historical and future earnings into the equation, this approach computes a value based on the fair market value of all tangible and intangible assets. Net Asset Accumulation or Excess Earnings Method are the two most common methods used to apply the asset approach. Although this method is the least effective way to properly value the most operating and cash-flowing businesses, it can be the most useful when the FMV replacement cost of all business assets represents a majority, if not all, of the value of the company.
Income Approach
The income approach represents the present value of a company based on the future cash flow of the business with an appropriate amount discounted for the risk and liquidity. This approach has several complicated methods, including Discounted Future Cash Flow and Capitalization of Earnings methods, which are more useful for much larger companies whose valuation heavily depends on future projections, growth rates, and risk premiums.
Market Approach
The market approach is a method very similar to the real estate market comparable method. Used for business valuations, Direct Market Data Method, Guideline Transaction Method, and Public Company Method are among the most common market valuation methods used for small to mid-size businesses. These methods have one similarity; the data utilized across these methods are all from sold business transactions in similar size and industry, aka the market comparables. By conducting extensive research and analysis of each unique business that was sold based on various factors, we narrow down to the last data set of the market comps from which we calculate a multiple of earnings relative to net sales, earnings, etc. This method is the most reliable in achieving the best and most accurate results for valuing small to mid-sized companies.
Multiple of Earnings
The majority of small to mid-size businesses are going to sell on the multiples of historical earnings, assuming the earnings will continue after the sale of a business. You could ask any business owner. The net profits shown on their business tax returns are typically the worst-case scenario and not the best indicator of the business’s actual cash flow. To reduce their tax liability, business owners attempt to minimize the net profit shown on the tax return.
An experienced broker must recognize this to uncover the true economic benefits an owner-operator would generate from a business by carefully analyzing each line item of the tax returns. Overlooking any of these aspects, thus understating or overstating the total financial benefit of a company, will drastically affect the valuation, and its outcome can be extremely costly to all parties involved in a transaction.
SDE = Pre-Tax Net Profit + Interest + Depreciation + Amortization + Owner’s Salary + Additional Owner’s Perks
EBITDA = Pre-Tax Net Profit + Interest + Taxes + Depreciation + Amortization
So, we call it Seller’s Discretionary Earnings (SDE), a calculation of the total financial benefit that one full-time owner-operator would derive from a business on an annual basis. It is also referred to as Adjusted Cash Flow, Total Owner’s Benefit, Seller’s Discretionary Cash Flow, or Recast Earnings. SDE is most suitable for businesses in the Main Street market, earning less than $1 million a year.
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is mainly used for mid-size businesses in the lower middle market with earnings more than $1 million a year. In a nutshell, both EBITDA and SDE represent all the profit available to one owner-operator as if the company was debt-free with one exception for EBITDA, in which an executive’s normalized salary and benefits are factored.
What is the Multiple?
Multiples are the culmination of hundreds of thousands of sold business transactions known as the market comparables. The final dataset of the market comps refined by industry, size, region, sales price, earnings, sale dates, and various other factors are extensively analyzed to produce multiples most suited to your business. Using multiples that best represents your business is extremely important in valuation as it will have a significant impact on the conclusion. These carefully selected multiples are applied to the weighted average figures on your financials like net sales, gross profit, SDE, EBITDA, etc. before the fair market value (FMV) of your business is determined. Keep in mind.
The multiples are not just driven by numbers but involve many other critical factors like location, size, competition, growth rate, industry trends, quality of the books and records, cost of capital, risk, barriers to entry, and ease of transfer as these elements are what Buyers would consider before making an offer to purchase a business. It may rise or fall depending on these critical factors. Then, what is the right multiple? That is why you need professional guidance and advice from our highly trained valuation experts with years of transactional experience in the sale of businesses.
Conclusion
Determining the value is the very first step in the process of selling a business. Whether you contemplate selling your company now or planning your exit in the future, we can fully assist you by providing a confidential business valuation for your business, a.k.a. Broker’s Opinion of Value (BOV), done at no cost to you. When it comes to valuation, our objective is to maximize the value of your business using our market knowledge, advanced data, and our proven valuation techniques perfected from successfully selling hundreds of small to mid-size companies over the last two decades.
Even if you are not contemplating a sale of your business today, you need to prepare yourself with an exit strategy that will achieve the maximum value for your business when it comes time to sell. Your business may be a substantial part of the assets you own, and you need to know where you stand in the marketplace now. It is not a question of if you will ever exit your business; it is a question of how, when, and what price. Take the first step to prepare your business for sale with our confidential business valuation report, Broker’s Opinion of Value (BOV). We will help you uncover the Fair Market Value (FMV) of your company and get you every dollar you deserve for the company you’ve built with years of hard work.
Knowing what your business is worth is just as important as deciding when to sell your business
Valuation is more than just science, but a form of art that can vary drastically depending on the appraiser’s judgment, skill, and quality of methodology. Be sure that you have the right expert with hundreds of transaction knowledge and experience to help you uncover the maximum value for your business. Please don’t wait until it’s too late.
A free consultation may be the difference of selling your business for half the value or the maximum value.