Question: Is there an equation I can use to find the worth of my business so that I may present prospective buyers with a realistic selling price?

Answer #1: Determine the value of a business is multi faceted.  There are many integral factors that affect the value of the company: type of company, # of employees, sales, assets, EBITDA, etc.  Each business has a different set of factors, therefore one generic method or formula does not apply to all business.  When trying to place a value on your business, my first suggestion would be to obtain a business valuation since you are probably selling the most important asset you own.  If you do not want to go that route, there are very “general” rules of thumb.  If I was to sum it up in the main factor of pricing your business, it would be a multiple of Adjusted EBITDA, which is defined by adding Net Income + Interest + Depreciation + Amortization + Owner’s Salary + Owner Perks.  The multiple is the hardest item to determine because it varies by industry, but in the small business environment, it ranges between 2-5.

Alex Vantarakis, Managing Partner, The Vant Group, Alex@thevantgroup.com

Answer #2: There are too many variables that have to be looked at to determine business value.  There is no “one size fits all” equation that applies.  Eventually, most values are determined by using a multiplier of cash flow because it makes sense and is easy for a buyer to understand.  However, to accurately determine fair market value it is recommended that a seller rely on the expertise of a professional broker and / or business valuator rather than risk leaving money on the table or waste time because the business is prices too high!

Roger Silvi, The Milford Network, rsilvi@milfordnetwork.com

Answer #3: Thank you for your question.  The best way to learn about the fair market value of your business is to contact a BBN Affiliate Business Broker.  We will determine your discretionary cash flow, value of your assets, and help you understand the true fair market value of your business.  If need assistance finding a broker, please reply to this email or go to our website to find a broker in your area. 

Richard Gadberry, CBB, Vice President- Affiliate Services, Business Brokers Network ^{SM
richard@bbnbrokers.com}

Answer #4: Many brokers use general rules of thumb for valuing businesses. Most of these rules are multiples of Sellers Discretionary Cashflow (SDC). SDC includes net income plus owner's salary and perks, and non-cash expenses such as depreciation = the cash the seller receives from the business. Most small businesses sell for somewhere between 1.5 and 2.5 times SDC. Larger businesses require a more detailed approach to valuation.  Business appraisers usually consider the asset base, income from operations and comparative sales to determine value. Regardless of the method used, the economics of the business must support the price: cash flow from operations must be sufficient to cover any debt service created in acquiring the business, provide for necessary capital reinvestment, pay the owner/manager a living wage, and have something left over that is an acceptable return on investment.

Mr. Lou Pereira, Herold-Lambert Group, Inc, lou@herold-lambert.com

Answer #5: No there is not a silver bullet for determining the selling price of a business.  Price is generally a function of cash flow in every business then you must ask the tough questions:

1.  What is the growth potential?

2.  Is it a manufacturing, wholesale or service business?

3.  Is it a clean business or must the owner get dirty everyday?

4.  How much family is involved?

5.  What payment terms will the seller accept?

6.  Is the business a one man band, i.e.. does the owner handle all in bound and out bound phone calls?  Can he get through a 1 to 2 hour meeting without interruptions?

This list of questions is not complete but it gives you some idea of factors that affect price.  The best thing a business owner can do is contact a Business Broker who is experienced in determining a selling price, knows how to fine a qualified buyer, and knows how to get your deal to the closing table. 

Gary L. Green, CPA, CBC, CMEA, www.ghtgroup.net , garygreen@ghtgroup.net

Answer # 6: No equation is perfect for every business. Unfortunately most professionals in their field such as accountants and attorneys don't see enough companies to be accurate in using the formulas that are available. This then leads to inaccurate estimates of value and unrealized expectations. The first step towards developing that value is to meet with someone who knows about how to do it and does it every day. This would include a professional business broker or a business valuation company. These people will factor in financing options, inventory, hard assets and seller's discretionary earnings (the true profit picture of the company not what the P and L or tax returns show). They will be able to give you a realistic market value and incorporate a thumbnail formula so you can determine whether it fits in with your picture of value which you can then add to your exit plan and determine whether now is the right time to sell.

Jeff Hoops, The Haley Group, www.thehaleygroup.com, jeff@thehaleygroup.com

I'll try to answer question number one...though there are so many variables that come into play... I would use a simple cash flow basis. When you recast cash flow, do not include manager's or owner's salary as part of the increased cash flow. That will need to be paid. The result will be a "real" net cash flow. The multiple to use for calculating a sale price (listing price) on that basis should average around 3.5 times cash flow. If the business has been slipping in volume and earnings, or if it has excessive assets relative to its sales, that multiple might be down to 2-3 times. If the business is humming along with good growth and ratios, I might push the multiple to 4 or more. Hope this helps.

Ed Walper, The Walper Group, www.thewalpergroup.com, ewalper@gmail.com