Friends,
Calculating the value of your business involves many different methods with varying degrees of complexity. A popular first step in determining the right time to sell a business is completing a proper valuation. The information below reviews high-level valuation techniques and gives a few insights into starting this process.
We believe in putting together a team of professionals to help you embark on this endeavor. As financial advisors, we help integrate our clients' business and personal finances.
Techniques for Valuing Your Business:
As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession/transition and estate planning purposes.
There are several valuation techniques, ranging from simple to very complex. Below are three different approaches to valuing a business.
- Asset-Based: Calculates the value of all tangible and intangible assets held by the business. This approach ignores the company's future earning potential. Thus, a pure asset-based valuation model is often used for businesses looking to liquidate.
- Earnings-Based: This approach seeks to arrive at a valuation by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract the owner’s compensation and related expenses. The multiplier can vary substantially, depending upon the industry, growth potential and the attractiveness factor. For example, a business is more attractive if the business can keep going and growing when the owner steps away from daily operations and sales.
- Market-Based: Compares the business to recent sales of similar companies.
Business valuation is not just a formulaic exercise. There are qualitative as well as quantitative factors impacting valuation. Ownership percentage will also matter; purchasing a minority share that has limited control may result in a discount on the actual value. The pipeline of prospects for the business and strength of recurring customers/revenue will also impact its value.
Willing Seller & Buyer:
The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. Consequently, any valuation exercise may yield only a rough estimate.
Before proceeding with a business valuation, consider working with an investment banker or business broker who are familiar with the process.
We’re happy to help put together the team that will help maximize your business value during a transition. Please reach out if you are considering a business sale in the next several years.
Andrew