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What’s My Business Worth?

Frequently, small business owners don’t stop to think about what their companies or operations are worth in value until they either get to the point of retiring and/or they have to give the business to someone else. Yet having a good perspective of what your business is worth via third party evaluation even years before the big ending, can be invaluable to helping set future direction.

A regular update of your business value in terms of fair market is critical to have in your back pocket as a business owner. Not everyone goes out in the market intending to sell their business every day, but that doesn’t stop businesses from being approached out of the blue when they are perceived as successful by bigger players. This situation is especially common in today’s tech markets. Then, of course, the question is how to respond to the offer? How about if an investor wants to get in on the action? What’s a fair value of ownership in trade for investment?

The BBC America cable channel has a wonderful show on each week named Dragon’s Den. The concept is that people who are looking for investors get a 15 minute pitch to four or five venture capitalists to sell their idea. Invariably, the VCs if they like the product offer investment for an ownership stake. The VCs have a very good idea what is a deal to them and what constitutes a waste of time. And, frequently, the people making the product pitch have no idea what their product is really worth in business terms. That’s when the VCs walk away with a 40% ownership stake for pennies. This type of poor selling is what is referred to as the down side of being in the dark, or just having just a rough idea of your business value. If you have no clue what your company is worth, you don’t have any context for making a decision.

An investor offering $1 million dollars into a growing company worth $2 million is a 50% partner. However, if the business is only worth $1.5 million then that same investor arguably gets majority control of the company just based on the numbers. That’s likely not the original intent when seeking to take on a funding partner.

On the flip side, using a company worth $1 million with no greater than 20% ownership available to an investor, only $200,000 can be targeted for growth. It might be better to take a small business loan instead and have 100% control of ownership. With no other debt, the bank would calculate a 20% loan-to-value ratio, which is very palatable to a lender.

Clearly, the above examples offer two very different strategy directions that become apparent when an accurate valuation is performed. And it’s common for many business owners going through a business valuation for the first time to go through a rough surprise versus their expectations. Much of the difference has to do with the owner’s perceived value versus what the accounting books represent. The reaction that their hard-earned work and sweat has no mathematical value is a hard pill to swallow. That’s because the energy and time involved in owning, managing, and expanding a business does not represent a usable factor in valuation. Instead, the defining factor is how much the business can produce in sales in the future.

External factors like the economy, both local and national, can sway worth projections as well. Management experience and skill are a measurable determination. The industry health the business operations in has an impact. A poor valuation may have nothing to do with the business measured internally and everything to do with outside forces.

Additionally, the frequency of valuations can have an impact on their credibility. A value-estimation should be performed when changes that impact the business occur or are expected. This can include shifts in technology, competition, the general economy/market or all of those combined.

Since business valuations are not cheap, the implementation of one should be used when it provides the most worth to the owner in terms of usable information. Otherwise, a regular valuation review every three or four years is a reasonable rule of thumb, especially in a well-established industry.

Closely held companies must have an independent valuation of their securities and assets for ensuring the successful acquisition of a business. Look for a professional corporation focused on business valuation, litigation support and valuation advisory services. You need a company with proper knowledge, experience and expertise to understand and determine the value of a company. A good company will have strong analytical and research techniques to accurately and independently determine value in today’s demanding marketplace.

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.

What’s My Business Worth?

Probably one of the most common questions business owners ask is “What is my business worth?”. Perhaps you want to do some retirement planning, succession planning, divorce planning, estate planning, etc.. This simple question has no simple answer, however. Valuations differ based on their purpose. For instance, the courts and accountants focus on a “Fair Market Value” without compulsion. For the sale of a business, brokers and valuation experts create a “Most Probable Selling Price” that takes the current market conditions into consideration. Let’s assume we’re looking to sell our business, and we want a valuation.

There are three main approaches to determining a most probable selling price:

1) Market Approach
2) Income Approach
3) Asset Approach

The market approach is based on the comparison of “similar” businesses that have sold when compared to ours, then projecting a value for your business. The principle of substitution would suggest that this is a reasonable way to come up with a valuation. There are several problems, such as comparing businesses in different parts of the country, or even state that might make this comparison inaccurate since local economic conditions vary. Also, comparing companies of significantly different sizes can skew the results since buyers typically pay higher multiples for larger companies.

The income approach looks at a view that presumes that a business is a cash generation machine, and you should compare your business to any other investment that generates cash. The big difference here is that small business is risky, so an accommodation for risk needs to be built in. A key part of the process is to identify the cash coming from the business through a process known as recasting. Recasting will take tax returns or financial reports and estimate the cash flow of the business that benefits the owner. This is often referred to as “Sellers Discretionary Cash Flow” (SDCF) or “Seller’s Discretionary Earnings” (SDE), or something similar. This cash flow number is then multiplied by industry specific ratios to estimate a value. Other variations on this method include a capitalization rate applied to the SDCF or looking forward and estimating the SDCF for several years and calculating the net present value of that cash flow (what the sum of future benefits is worth today).

Finally, the asset approach depends on the fair market value of the company’s assets. This is sometimes called the cost approach, since it deals with the physical assets of the business, and doesn’t provide much value for goodwill. In most businesses, goodwill is the majority of the value of the business. This approach is most useful for unprofitable businesses or businesses that have a significant investment in equipment or other assets.

Ultimately, the market determines the price of the business. Because every business is unique, expect negotiation on the price. Buyers buy the whole package, it’s not just price, but the perceived risk of the business, the prestige of owning that business, the volatility of earnings, strength of the industry, the local economy and a host of other factors not easily quantified. The opinion of value is the start of the discussion on what the business will actually sell for. You should get some help when its time to price your business.