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Determining an Asking PriceWe have created a web based calculator that will allow you to print a report detailing the value of your business. The Calculator is free and available now. There are a number of methods of determining a value for your business, and we will discuss the two most commonly used methods below. Since every business is unique, valuing a business is as much of an art as a science. All of the methods we will discuss below only give you an idea of what your business might sell for, not the business’s true value. The amount you calculate (a valuation), will only help you determine the asking price. Be careful not to become too fixed on these imprecise guidelines when deciding whether to accept an offer. The only real value of a business is what a buyer is willing to pay. Keep in mind that a business may be worth far more to one potential buyer than to another and that the value of every business changes over time. Capitalized Earnings MethodWith this method we look at the business like any other investment. Begin with the earnings from the recast financial statements. Adjust the earnings from those financial statements to reflect a fair salary and benefits cost for the owner of the business (if the business requires active management on the part of the owner). Next, add back any business expenses that would go away under new ownership to get an adjusted earnings number. Example: Finally, we take the Adjusted earnings and multiply by an appropriate price-to-earnings ratio. If an investor wants a 20% return on his investment (or a 5 year payback) we would us a multiple of 5 (100%/20%). Thus our hypothetical business above would be worth $165,000 X 5 = $825,000. An investor is going to choose a multiple to use for your business based on many factors such as:
A buyer might also make adjustments for synergies that they could take advantage of if they acquired your business. For instance, in the example above, if a buyer could save $25,000/year in expenses by combining your business with his existing operation that particular buyer might use $190,000 as the adjusted base. What multiple do I use?Choosing a multiple obviously has a big effect on the final price. You should seek advice from your CPA, business advisors, and business broker before choosing a multiple. If you belong to an industry-specific trade association they may also be able to provide data on multiples from recent sales. For guidance you can also purchase a report "Small Business Valuation Formula Multiples, 2002 Edition" which contains price/revenue and price/discretionary cash flow multiples, based on completed transactions, for over 100 industries at Amazon.com. Additional, more detailed information on completed transactions can be purchased BizComps. Another way to choose a multiple is to begin with a multiple from publicly traded companies that are in similar lines of business and then reduce the multiple. You base the reduction on factors such as lack of liquidity in a closely held company, increased risk due to small size of the company, and the risks of a transition to new ownership. The multiple can also be reduced or increased based on the performance of your company relative to that of the comparables that were chosen. Multiple of SalesIn certain industries, such as payroll processing or some types of printing a purchaser will not duplicate the seller’s costs, because the purchaser will use an existing infrastructure. In these cases, the purchaser knows what the gross margin on sales will be and calculates the purchase price as a multiple of sales. For a NO OBLIGATION consultation - Call us now at (734) 717 1108 |