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.
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 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:
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.
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.