Each month, we feature a guest blog post with success stories and other great information and advice we think thriving local businesses would care about. This month’s post comes from our friends at Transworld Business Advisors. Transworld is a full service business brokerage and consulting firm based in Denver, Colorado, assisting visionary individuals in the acquisition of a business, growth-minded entrepreneurs in national and international expansion, and business owners in the sale of their business for retirement, relocation, and career change. They specialize in helping family-owned and closely held businesses with their plans for the future.
If you are a business owner contemplating selling your company, chances are your first question is “How much is my business worth?” This logical inquiry into a company’s worth is the number one concern of most of our sellers and is of the utmost importance to any qualified potential buyer. So how should you go about finding out the true valuation of your company when preparing for a sale?
Unfortunately there is no ONE easy answer, as there are several different options for a business owner to choose from when researching the valuation of their company.
Transworld Business Advisors is here to help business owners and potential buyers navigate the web of options and understand all of the elements that play into a business’s “Fair Market Value.” Fair Market Value is essentially what a qualified buyer would pay for a business in an open market. In most cases, small business sales do not require an (oftentimes extremely expensive) appraisal done by a firm. Therefore, Transworld’s methods are typically satisfactory to determine a small business’ most appropriate sale price.
Most small business trade at a multiple of cash flow (SDE), and occasionally gross revenue. Cash flow is defined as ownership’s total compensation package. This number can include net profit, owner salary, health benefits, and non-cash expenses like depreciation and amortization. Once we have determined cash flow, a multiplier is applied to that number to calculate an estimated sales price. This multiplier is based on your industry, past sales in your area, and qualitative factors such as management structure, length in business, and competitive advantages.
We know this is complicated, so let’s work through an example together…
“Transworld Bar & Grill” did $1,000,000 in sales last year (2014). The net profit of the company was $50,000 and the owner paid himself $50,000 plus a health care benefit of $3,500. Because the bar is an equipment-heavy business, the owner also took a depreciation write-off of $10,000. All other expenses were normal and essential to business operations.
In this case the cash flow is $113,500 (net profit + salary + health + depreciation). Most restaurants sell for between one and three times cash flow based on past sales history. So the estimated fair market value of this business is between $113,500 and $340,500. In order to determine a more precise value, we would have to learn more about the company.
The table below includes a general range of multipliers for some of the most common industries:
Cash flow is just one of many factors that need to be considered in the value calculation, others could include management / employees in place, length in business, market position, barriers to entry, and many more that will also have a large impact.
If you have additional questions about this article or would like to receive a free business valuation template from Transworld click here.