What Is My Business Worth?

What is My Business Worth? By Steve FitzGerald Partner

What is My Business Worth?
Some of the key factors that will influence what someone will pay for your business will include:
Historical Earning Power after recasting the Tax Return Information
Buyer’s perception of the risks and the upside under their ownership
Stability of Margins
Customer or Vendor Concentration
Proprietary technology and/or barriers to entry
Strength of Balance Sheet, particularly assets other than Goodwill being acquired

Historical Earning Power* after Recasting the Tax Return Information
The following are some examples of expenses that can be added back to reported earnings:

Non Cash Items such as Depreciation and Amortization
Interest Expense
Owner Discretionary Expenses (personal expenses paid by the business)
Non Recurring expenses such as “one off” legal expenses or perhaps moving expense
Profit Share paid to owner
Amount of owner compensation (Salary + Bonus) above the cost of a competent General Manager
* Typically defined as least three (3) years Federal Tax Returns

Buyer’s Perception of the Risks Will Affect the Return on Investment (ROI) Required
The more risk perceived by the Buyer, higher (ROI) will be required which will DECREASE the valuation of the business
The less risk perceived by the Buyer, lower ROI required which will INCREASE the valuation of the business.

Examples

If historical margins are stable or have decreased, perception of risk decreases
If historical margins have fluctuated or increased, perception of risk increases
No one customer greater than 10% of revenues, perception of risk decreases
One customer historically 60% of revenues, perception of risk increases
Patent protection or other barriers to entry will decrease perception of risk
Cyclical industry or challenging industry (construction in the current environment) will increase perception of risk

Privately Owned Business will Typically Sell for a Multiple of their Historical Earning Power
Buyers will typically average historical earning power, perhaps giving more weight to most recent years and less to other years.

For example, if the recast earnings for 2006, 2007, and 2008 were $400,000, $450,000, and $500,000 respectively, then one method of calculation would be
$400,000 x 1 = $400,000
$450,000 x 2 = $900,000
$500,000 x 3 = $1,500,000
$2,600,000 /6 = $466,666 weighted average

Having arrived at a weighted average of the last three years, the Buyer will apply a multiplier based upon their ROI requirement.

Examples of How ROI Affects Perception of Value
If the weighted average of a business’s earnings is $500,000 after Recasting, the Buyer would calculate value based upon perception of risk as follows:

ROI 50% = High Perception of Risk means a 2.0 multiple or $1,000,000 valuation. A 50% ROI means the Buyer wants to get their investment back in two (2) years

ROI 33.3% = Medium Perception of Risk means a 3.0 multiple or $1,500,000 valuation. Buyer wants investment back in three (3) years.

ROI 25%= Low Perception of Risk means a 4.0 multiple or $2,000,000 valuation. Buyer wants their investment back in four (4) years.

In this example, the same business can sell for between $1,000,000 - $2,000,000 depending on the Buyers perception of the risks and their assessment of potential upside under his/her ownership.

Free Market Appraisals or Valuations
ASG ( www.ASGSoCal.com ) has been assisting owners of private business for over 27 years

ASG is prepared to provide owners with a Fair Market Valuation without cost or obligation.

To discuss whether your business would qualify for the free valuation, call (858) 320-0474 or email Steve@ASGSoCal.com.

What Is My Business Worth?

by Acquisition Services Group, Inc on Jun 25, 2009

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