What Is My Business Worth?
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There are several reasons to want to know the value of your company. Below is a summary of an article written on business value by Andrew Cagnetta, one of our business valuation experts.
Business valuation is an art not a science. Valuations are subject to the appraiser's judgment, skill and quality of methodology. There are several standards of value for businesses, i.e., different values.
Fair Market Value - The True Market place: The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.
Intrinsic Value - Stock values that investors would consider
Fair Value - Legal standards to value. Often used in divorce
Investment Value or Strategic Value - The value to specific buyers. Could exceed fair market value.
1. Asset Approach: Values the assets of your business minus the liabilities. Some of the methods in this approach are book value, excess earnings method, asset accumulation method to name a few. However these values usually mean very little to the market value of most operating businesses. For the most part the asset approach does not properly represent the value of an ongoing business that has positive earnings.
2. The Market Approach: Simply defined, it is much like a real estate comparable method. Like businesses in size and industry sell for similar valuations. There is the guideline publicly traded company method or the merger and acquired company method (private sale databases). There are many databases we can research to find multiples of gross sales and earnings to compare to your business. This method can be very reliable in most cases and is a strong indicator of value
3. The Income Approach: Your business is worth the present value of the income stream it will bring to an investor. There are several complicated methods including the discounted future earnings method as well as several capitalization methods. This approach is also a strong indicator of what a business with positive income is worth. These methods rely on future projections and growth rates to decide what the business may be worth. If that is true then why do most people multiply or capitalize historical earnings to arrive at a value? Because the assumption is the buyer will maintain the current income levels and they are a reasonable indication of future earnings.
How to value a business?
There are Three Generally Accepted Approaches to Valuing a Company:
First we must discuss what you want to multiply? Net income? EBITDA? Owner's benefit? In small business sales (businesses earning less than 1 million dollars), we use owner's benefit. Owner's benefit equals the net income, plus depreciation, interest, and the owner's salary and fringe benefits. In other words, all the income available to ONE owner if the company was debt free. EBITDA is used by larger businesses and includes normalized salary and benefit package for an executive to operate your business.
What Is The Multiple?
The multiples of owner benefits can run from less than one to about three. If your company is larger and your EBITDA is near or above one million, the multiples can run from four to six. Is this set in stone? NO! How do you know which multiple would be used for your business? Well, the multiple will rise along with the size, quality, and verifiability of your owner's benefit. Bad books, dim future, negative growth, and little profits equal a low multiple. Excellent books, bright future, excellent growth you will garner a high multiple.
Okay, Now The Multiples.
Multiples of Your Past Earnings
For a free consultation call, text, or email Christopher B. Scully at Transworld Business Advisors
(904) 993-2908 or email Chrisbscully@tworld.com