How Much Is My Business Worth?

Did you ever notice that the attitude of a seller of real estate is often substantially different than the attitude of a buyer? Sellers have been known to irrationally claim their property has more value than it does, despite evidence to the contrary.

The buyer often sneers at the seller’s price, and claims the property is hardly worth buying, that the seller is crazy, and that as long as the seller thinks he has such a treasure trove, he can keep it.

Now here’s where it really gets fascinating. All buyers eventually become sellers. Some well meaning folks will display both attitudes, first the buyer’s attitude when they purchase (This property is hardly worth buying.), and then years later when they are ready to sell, they display the seller’s attitude (This property is a hidden treasure worth far more than I paid for it, and any buyer would be lucky to have it.). I love to watch and learn about human behavior, and this behavior fascinates me.

Let me bring this home to roost where the most eggs are laid. Small business owners. Many small business owners drive a hard bargain when they purchase their business. During the years they run the business, many don’t show all the income on their tax return. For example, it is commonly known that coin operated businesses are ripe with opportunities to skim coins off the top without reporting that as income. Another approach, within legal limits, is to deduct the heck out of everything and show virtually zero net income. And the Trap . . .

Is that when it comes time to sell, they want more than they can justify, because they can’t prove to the buyer it really makes all that income.

Key Point. When you purchase a business, always operate the business as though you intend to sell it to get the highest possible FMV. If you can’t prove income, you won’t get your price.

Buy A Business Worth Over A Million Dollars-Even If You Just Filed Bankruptcy Yesterday

If you’d like to know how you can buy a large, multi-million dollar business — one that pays you a fat, six-figure salary year in, and year out — and be able to do it even if you have rotten credit with a recent bankruptcy on your record, then this article will show you how.

Listen: People I talk to about buying businesses always hear me rail about how it’s actually faster, easier and cheaper for you to buy large businesses (worth a million dollars or more) than small businesses, and that the reason why is because of this thing called investor financing — as opposed to owner financing, bank financing, government loan financing, etc.

In other words, say you filed bankruptcy last year. If you go out and try to do something under your name, you’re never going to be able to do anything. The business brokers, bankers and other bureaucrats won’t touch you with a ten foot pole, especially if you have money problems on your record. But if you walk in with an investor…who is putting up cash…then they won’t give a hoot about you or care one iota if you just filed bankruptcy yesterday.

And that’s why investor financing is so powerful. However, there are certain criteria an investor bases his decision on before working with you. And if you don’t understand these criteria, you’re dead in the water as far as getting investor financing.

Luckily, the key thing an investor’s going to want is information on the company. And what you’re going to find is the average investor is spending 99.9% of his time on the business because that is his main thing. And one of the first things he will do is make sure the business you want to buy has a strong management team in place. That way, he isn’t all that worried as far as how much management experience or money you do or don’t have.

Of course, there are other things investors will need before financing a business for you. But the main thing (besides you having a good business plan) is that the business you want to buy already has a competent management team in place.

How Much is My Business Worth?

If you are considering selling your small business, it will be important for you to evaluate your business in order to derive a reasonable asking price. Experts recommend that you assess the business from more than one angle in order to obtain an accurate picture of how much your business is worth.

Rules of Thumb Methodology

Begin by analyzing the history of your business to determine how much profit the business has been earning in excess of your own salary and benefits. Project future data based on your specific history, as well as general market trends to establish if the past is a fair representation of the future. This is typically known as “Rules of Thumb” methodology.

Market and Industry Trends

In examining trends, it is necessary to consider such items as supplier price changes, competition, and how the particular industry is performing. Also, take a look at prices paid recently for comparable companies in similar locations. Additionally, compare your company’s year-end gross profit and operating income to other industry competitors. If your company is closer to the top of the range in profitability, you can command a higher price for your business.

Owner Benefits

Then investigate the value of your business by using the Multiple Method; a pre-determined multiple (usually between 1 and 3) multiplied by the earnings of the business. The earnings or “Owner Benefits” amount can typically be used as an effective basis. This number is the total funds that you can foresee being available from the business based on past experience. The value is derived by adding the owner’s salary and benefits to the business’s profits; then adding back non-cash expenses.

The multiple that is used is mainly based on the industry. It is usually one time the value calculated if the business owner is the entire business, such as consulting or freelance services. Businesses with a solid customer base and more than 3 years in business most likely will be worth 3 times the basis.

ROI

Another calculation that should be looked at is the Return on Investment (ROI) that a buyer could expect to receive if they purchase your business. This is calculated simply as Gain from Investment minus Cost of Investment divided by Cost of Investment.

Assets

In addition, take into consideration the value of the business’ assets. This includes inventory and equipment.

Overall, it is important to keep accurate financial records. Buyers seeking financing to purchase your business will need to present information to back up the price being paid for the business.