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.

How Much is My Business Worth If I Sold It?

Does a business owner know what his business is worth – we suspect he thinks what the firm is worth, but in fact does not know if that is what the market would call a ‘ fair ‘ price.

When a company is private and the business owner is contemplating selling there are essentially two methods that one focuses on:

1. The value of the hard assets

2. The value of the business as an ongoing concern

When we look at category #1 above the focus gets more specific. The owner should ask himself if the business were liquidated what would be the price of those assets. Asset valuators actually break that category down into two other areas – fair market value, forced value. By forced value we mean a third party usually coming in and selling assets immediately at best bid. As one can imagine that is never the optimal selling strategy!

When someone is considering buying a business they consider the ‘book value ‘of the assets – which is simply the value on the accounting books relative to any debt on those assets. That clearly is also not an optimal number for the owner, and even the buyer sometimes, as it focuses on accounting and deprecation issues, not the true value of the asset in today’s market.

Focusing on our item # 2- Going Concern – when a third party looks to purchase a business he views the asset in the context of using those assets to generate future profits.

This brings us into the main category in the Going concern valuation method, which is the earning capitalization. Buyers, ( and sellers obviously ) focus on looking at the earnings over the last number of years, placing a realistic value on those earnings, and then determining how many more times over that level of earnings the purchaser will pay.

Lets use a simple clean example – A company has earned 200,000$ net over the last 5 years. But 100,000 of that is owner’s salary. That 100,000 are deducted from earnings in the value calculation. So we are left with $ 100,000.00.

If a potential investor wants to earn an over all return of 10% on his money then he should be willing to pay 1 Million dollars for the business – the purchaser has ‘capitalized’ the investment at ten times the return.

Business owners should also know that each industry has its own capitalization rates, and the owner would do very well to investigate what capitalization rates firms in his industry are selling at. Naturally many of those numbers are smaller private deals that aren’t published, so the owner can do two things:

Research comparable public firms in his market space

Or

Used the services of a trusted third party advisor who knows his firms industry.

The general guidelines for determining the capitalization rate are:

– growth potential of the business

– the current economic environment

– the firms position in the marketplace

– overall financial structure and stability

– management

In summary, business owners should probably be investigating valuations of their business far before they actually entertain an offer. This will allow them to focus and negotiate with strength based on solid data typically used by third party purchasers – The Boy Scout motto works once again – ‘Be prepared ‘!

Is An Online Home Business Worth The Effort?

The idea of setting up a work from home internet business does appeal to a lot of people but many never actually doing anything about it. Having your own ‘part time business’ that brings in extra income and satisfies your inner entrepreneur desires sounds great, but is it really worth the effort?

How can you build an online home business if you don’t have anything to sell? And, suppose you did have a product or service, how would you actually sell it on the internet, or get it shipped to the customer and then receive payment for it? These challenges are often the obstacles that aspiring online business owners believe will prevent them from ever getting a business on to the internet. But these barriers that are simple to resolve.

Where Do You Start?

The global economical problems over the past few years have been very tough for conventional business ‘offline’ owners. But, conversely, there has been a huge increase in the number of people buying goods and services on the internet. This is good news for people who have taken advantage of internet home business opportunities.

Probably the most popular strategy that entrepreneurs use to generate revenue on the internet is affiliate marketing. Although there are many online home business models available, affiliate marketing must rank as one of the top ones, if not number one.

Basically, the affiliate marketing model is when you promote someone’s product over the internet. You can sell digital products, tangible products, or both. Digital products include eBooks, video courses and membership websites that can be used online or downloaded directly to the customer’s computer. A tangible product is something that is physically delivered to the customer’s address.

A Proven Home Business Model.

Affiliate marketing is great way to start a work from home internet business. There is a wide range of different business markets that you can get involved in. You do not need your own product or hold any stock. Additionally, you don’t have to organise any deliveries or get concerned with payment systems as the product owner takes care of all of these issues. Your job is to find the customers and promote the products to them. When they buy something, the product owner pays you a commission.

When starting your own online home business, the main thing is to get involved with an industry or product line that you like. It will be challenging to keep your commitment going with any type of online business if it concerns something that does not interest you.

Having a work from home internet business is very fulfilling. As your business grows you can enjoy the extra income that it delivers and have the satisfaction that you have created it. Eventually as it becomes more profitable you may be able to give up your regular day job and enjoy the freedom that of working when and where you want so long as you have a computer and access to the internet.