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How much is your business worth?When thinking about selling their company, usually the first question a businessperson asks is "How much is it worth?" Unfortunately there is no cut-and-dried answer to the question. Entire books have been written about valuation. There are so many variables involved (and many of them are very subjective) that different experts looking at the same company could end up with different selling prices. There are some commonly accepted techniques and rules of thumb used, which are presented here.
For example, the industry's multiplier may be two times sales, but the firm has experienced strong, consistent growth in the past three years - that may boost the multiplier to 2.5 or higher. Or perhaps the firm has one client that makes up one-half of its billings - the higher perceived risk may drive the multiplier down to 1.5 or lower. If your business has low fixed costs, few assets and little retained earnings, the sales multiplier technique may be appropriate. Examples of positive factors (that raise multipliers) include:
Here is a very important point about the factors just listed: If your company has one, or even a few, of the negative factors, you are typical! There is no perfect business, but buyers will use these factors to negotiate the price down. The price is based on the company's ability to generate a stream of profit (which can be defined in different ways) or cash flow (sales less expenses). The seller then projects this stream of cash over five or more years to calculate the worth of the business. Often, discounted future earnings are used which takes into account the time value of money - cash received in year five is discounted based on projected interest rates. Intangible assets may be worth money too - goodwill, customer lists, trademarks, patents, leases, permits and contracts are all intangible assets that can be factored into the price. Many buyers balk at paying a lot for intangibles, but for the seller it pays to evaluate each one for its worth. Hiring an appraiser is often a good idea when the price of a business will be based largely on assets rather than cash flow. In using the above listed conditions as a starting point the business owner can evaluate and come to a practical and useful valuation for his company. |
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