How to value a business

Whether you are just curious to know or are in the process of accepting offers, you are going to need to be aware of the ways to value a business.

Valuing someone else’s business

The methods described below are based upon financial statement analysis. It is highly unlikely that you could use these methods to value someone else’s business without first having prior consent to view their statements. If you are interested in valuing someone else’s business, consult first with a business broker who will help you use comparable sales data to determine a general estimate and a reasonable offer.

Valuing your business

There are three common methods to valuing businesses. Though each is quite similar, one method is typically preferred amongst particular industries. For example, in the wine industry it has been common for revenue acquisitions for purchases of large wineries. Contrary, a small daycare would likely be appraised using the owner benefit method.

However, each method is very similar in derivation. Each is simply a number taken from the income statement and multiplied by a number generally ranging from one to three: the multiplier. Multipliers vary industry by industry, and on a case by case basis. The multiplier is usually a key point in negotiation because it is flexible unlike audited financial statements. Further information on multipliers should be looked into with an expert in the particular industry.

Owner benefit method

Many believe this method makes the most sense for small, private businesses. Owner salary and perks are added to profit because the future owner might not want to foot these bills and thus cash flow could be higher – which benefits the seller. Capital expense amortization is reversed because it reflects common necessities in running a successful business, that the future owners might decide to cut back or increase.

[Pre-tax Profit + Owner Salary + Perks and Expenses + Interest – Amortization] x Multiplier.

EBITA

This type of acquisition is sometimes used for larger businesses where perks like expensed cell phones and company cars for key employees are negligible. Also, the owners might not draw a salary, they might be paid in dividends. Valuation is simply

EBITA x multiplier.

Revenue

The simplest of all acquisition methods: revenue times multiplier. This method is popular for very large acquisitions in the 100s of millions. In this case the parent company is buying market share.

Liquidations

In the event that your company is being liquidated, it is likely that value will be determined from the balance sheet. What assets, if any, can be sold within a year to repay creditors.

Professional help

When engaging in a transaction, consider the professional help of business brokers, appraisers, or merger and acquisition firms with insight into your particular industry. The methods described above are a good start as an individual for you to gain a perspective on what you might be able to earn for selling your business. However, given the wide variety of multipliers and the way multipliers are negotiated in a particular deal, professional help is likely to be a good business decision.

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