What is Your Business Worth?
The old saying is that the only things in life that are inevitable are death and taxes. But for business owners, there is one more item to add to that list – exiting the business you own. The “trigger” for that event could be a sudden illness, an unexpected accident, an “offer you can’t refuse”, or God forbid, death of the owner.
That event may seem to be a long way off, but like objects in a rear view mirror, that event is often closer than it appears. This is especially true for owners who are 55 years old or older. No one is guaranteed physical health, mental sharpness or even life, tomorrow.
What is My Business Worth Today!
The basic formula for Business Value is :
EBITDA x Adjusted Industry Multiple
(EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization)
The basic approach to determining business value consists of the following 3 steps:
Take the average sales price and average EBITDA over the past 3 years, and determine the average Industry Multiple involved in recent business transactions of similar businesses in the regional area.
Adjust the average Industry Multiple based on differences in 10 key factors to determine the Adjusted Industry Multiple for a specific business.
Multiply the average EBITDA of the past 3 years times the Adjusted Industry Multiple.
What are the Factors Driving Business Value?
||The kind of buyer
||- A strategic buyer|
- Selling to loyal employees
- Selling to family members
||Consistently predictable profit over a 3-5 year period
||Recent trends in the revenue, expenses and profit of the business performance are often included in making adjustments to the multiple|
||This is an adjustment to reported profitability to determine what income a buyer can expect from the business|
||Rate of Business Growth
||If the rate of growth is 15% or more higher than the industry average, this can yield a significant increase in the multiple.|
||The fraction of total customers that make up 50% or more of the business (low fraction leads to lower value), the years that key customers have been with the business, total customer turnover rate and retention duration|
||Minimal Reliance on One Key Person/Owner
||If the selling business owner is playing the key role in business development or customer relationships, then the value of the business will be lower since the business will need to replace that key person when the owner leaves the business|
||Management Depth and Quality
||The depth of people in key departments or functions, the technical capabilities and performance of managers, and the training programs that managers have experienced.|
||Competitive Positioning in the Market
||The business's place in their market versus competitors in terms of pricing tiers and how their margins compare to key competitors influence business value|
||Minimal Debt to Equity Ratio
||There is usually very little impact on multiple, as the debt payoff or reduction can be handled in the transfer of net proceeds to the seller.|
||Working Capital Requirements
||Higher working capital requirements leads to lower multiples and lower business values.|
For a complementary assessment of what actions would be appropriate for your situation to maximize your business value, contact Bob Viney, ActionCoach Business Coaching at: firstname.lastname@example.org or 513-335-8870.