After considering the various pros and cons, you have decided to sell your business. Over the years you may have invested a good deal of sweat, hard work and energy (not to mention cash) into your “baby.” But knowing how to put a price tag on your investment can be difficult. Nevertheless, you certainly want to get a fair price.
What factors should you consider when evaluating your business’ net worth?
There are a number of facts you need to know. First, keep in mind that there is no exact science when it comes to determining the value of your venture. Be that as it may, smaller businesses tend to sell for 2 to 4 times cash flow. In the event of a very small business, the multiple could be as low as one. On the other hand, mid-sized businesses may sell for 3 to 6 times cash flow. This multiple could be even higher for some businesses.
Here are some tips on how to come to a reasonable value for your business:
- Look at your business’ cash flow. Cash flow is a vital element in determining your company’s value: Smaller businesses are evaluated based on Seller’s Discretionary Cash Flow (Owner’s Salary & Benefits + EBITDA (Earnings before Interest, Taxes, Depreciation, & Amortization). Mid-sized businesses are generally evaluated at EBITDA or EBIT (Earnings before Interest & Taxes).
- What does the future look like? The actual value of a business is dependent on its future performance. Future performance depends on the business’ current performance and forecasts for the future, as well as what the buyer actually plans to do with the business once acquired.
- What is the buyer’s ROI? The buyer’s Anticipated Return on Investment (ROI) is also a vital factor affecting a business’ valuation; the higher the potential return and the lower the risk involved, the greater the value. But, where the risk is high, like for example, where sales are historically inconsistent, then the lower the value of the business, even if things could change in the future.
- Take stock of both hard and soft business assets. A company’s assets are an important factor to consider when determining value. There are hard assets, such as equipment, furniture, and inventory, and there are soft assets, such as patents and software. Are all of the business’ assets for sale? Do you plan to include accounts receivable and inventory?
- What is the business’ history? Has it built up a good image or brand? Is there a loyal customer base? Will the current workers stay with the new buyer?
- What does the market look like? Is this business operating in a volatile or high risk industry, such as food services? Is there a lot of competition from other businesses?
Evaluating your business properly is not a simple undertaking since it concerns several factors, many of which are hard to quantify. It is recommended that business owners looking to sell their business consult with an expert in the field in order to reach a realistic estimated price.