Valuations – Do you know the market value of your business?
Many entrepreneurs have much, if not most, of their personal wealth tied up in their business and, therefore, have a very strong self-interest in getting a good answer to this question. The challenge comes in exactly how they go about getting that answer. Oftentimes they have developed an idea of the market valuations of their company from not so reliable sources. It is not uncommon for an owner to believe that because a friend or business acquaintance shares with him that he sold his business for X times earnings, his company must be worth Y amount of dollars using the same formula.
Valuations – Multiple of EBITDA is one common method
Unfortunately, it is not that simple. While a multiple of earnings is one commonly employed valuation methodology, there are great number of factors that affect the values used in that calculation. For example, earnings, typically defined as EBITDA (earnings before interest, taxes, depreciation and amortization) must be evaluated for consistency over time as well as adjusted, or normalized, for the effect of income or expense items that would likely not continue or that would change materially after a sale of the business. Below market rent being paid on the building in which the business operates because the owner owns that building separately and above market salaries being paid to family members working in the business are just two examples of adjustments that would have to be made to reported earnings before applying a multiple.
Similarly, the multiple that potential buyers will put against the normalized earnings of the business can be affected by numerous factors. The overall level and growth rate of the company’s sales, the degree of concentration of those sales across the customer base, the existence of proprietary products or services, and the strength and depth of the management team that would remain in place post-sale are all key factors that can affect the size of the multiple that potential buyers would use in valuing the business.
And the multiple of earnings method is just one of many that may be appropriate for determining the value of any given business, all with similar variations dependent on factors that can have a major impact on the value derived by each.
Valuations – A seasoned professional can assist in increasing the value of your buisiness
So what does this mean to the business owner who just wants an answer to his question “What is my business worth?”. It means that the smart business owner looking to assess the value of his company will turn to a seasoned professional who not only understands the various valuation methods that can be employed and the variations of each, but more importantly can assist the owner and his management team to focus on the actions they can take today to ensure that the owner realizes the greatest financial return for his business when he does sell tomorrow.
B2B CFO® Partners are trained and licensed as Certified Business Transition Experts™ and as such are uniquely qualified to assist owners in preparing their businesses to be sold for the maximum value possible.
Please ask for our free B2B CFO® Discovery Analysis to address any of your business transition questions, or you can contact me directly at firstname.lastname@example.org or (415)286-1360.