How Much is my Business Worth?
The Valuation of a business is the main question all sellers will ask about when considering selling their business, and it is also the main question of most buyers when purchasing a company.
There are several standards of value for businesses, they consist of the following;
Fair Market Value – This would be the price at which the property would change hands between a willing buyer and a willing seller. The buyer would have done his due diligence and the seller would provide as much information to the seller as feasible.
Intrinsic Value – the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.
Fair Value – is a rational and unbiased estimate of the potential market price of a good, service, or asset. It takes into account such objective factors as: acquisition/production/distribution costs, replacement costs, or costs of close substitutes.
Fair Market Value – in its simplest expression, the price that a person interested in buying a given asset would pay to a person interested in selling that given asset and what it would fetch in the marketplace.
There are three typical ways to valuating a company
Asset Value – The assets of your business minus your liabilities. For the most part this valuation does not properly represent a company that has positive earnings.
Market Value – This would be the process of comparing like companies in like industries with similar sizes. This process is usually a good indicator to establish a valuation on your business.
Income Value – Your business is worth the present value of the income stream it will bring to an investor. This approach is typically utilized most for a business with a positive flow of income. This method relies on future projections and growth to decide what the business may be worth.
Multiple of your past earnings to Value a Business
When utilizing the income value, a multiple of past earnings can be applied
But first we must decide if the multiple will be of the Net Income? EBITDA? Owners Benefit? The common ways would be either owners benefit which equals the net income, plus depreciation, interest and the owners salary and other fringe benefits and no debt, and this would be all the income available to a single buyer. Or EBITDA which is net income with interest, taxes, depreciation, amortization and any owner benefits added back to it.
The multiple used on a business can vary, there is no one multiple specific to a size company or industry, there are some common multiples based on the current market, but various things may determine what your multiple could be, multiples could rise along with the size, quality, and the proper documentation to verify an owners benefit. Bad books, a dim future of the business, negative growth and little to no profit will lower your multiple, and good books, a bright future, consistent growth and positive income will increase your multiple.