What is My Business Worth?

Unlocking the Puzzle: Deciphering the Value of Your Business

Assessing the value of your business is a pivotal question for sellers contemplating a sale and a significant concern for potential buyers. However, the path to valuation is intricate, often yielding multiple answers due to the nuanced nature of this art form.

Understanding the Diverse Standards of Value

Business valuation is an art, shaped by the judgment, skill, and methodology of the appraiser. Various standards of value exist, each shedding light on different aspects:

  • Fair Market Value: The price at which a property would change hands between a willing buyer and a willing seller with reasonable knowledge, not under compulsion.
  • Intrinsic Value: Stock values considered by investors.
  • Fair Value: Legal standards used, often in divorce proceedings.
  • Investment Value or Strategic Value: The value specific buyers see, potentially exceeding fair market value.

For our focus, let’s delve into Fair Market Value – essentially what a buyer would pay for your company in an open market.

The Three Approaches to Valuation

  • Asset Approach: Values the assets of your business minus the liabilities, though it may not fully capture the value of an ongoing business with positive earnings.
  • Market Approach: Similar to real estate comparable methods, this approach values businesses based on similar sales in size and industry, often reliable and indicative of market value.
  • Income Approach: Determines the present value of the income stream the business will bring to an investor, relying on future projections and growth rates, often using multiples of past earnings.
Multiplying Past Earnings – The Multiple Conundrum

Your business is worth a multiple of past earnings if a buyer can project that these earnings will be maintained post-purchase. The multiple is key and varies based on the chosen financial metric. Small businesses (earning less than $1 million) often use the owner’s benefit, with multiples ranging from less than one to about three. Larger businesses (EBITDA near or above $1 million) may see multiples ranging from four to six.

Factors Influencing Multiples

The multiple is not fixed and rises with the size, quality, and verifiability of your owner’s benefit. The state of your books, future outlook, growth prospects, and profitability play pivotal roles in determining the multiple.

The Buyer’s Perspective

Buyers ultimately determine a business’s sale price, making it a subjective evaluation. No expert can precisely pinpoint your business’s worth. Each buyer perceives value differently, underscoring the importance of presenting a strong narrative and showcasing the potential for sustained success.

In the intricate dance of business valuation, confidence arises from understanding methodologies, recognizing your business’s strengths, and conveying its potential to prospective buyers. While the exact value may remain elusive until a deal is struck, navigating this journey with informed confidence ensures you are well-prepared for the eventual sale of your business