How to value your business
Whether because of retirement, career change, or a strategic move, selling your business can be a stressful and complicated task. One of the most common obstacles is determining how to value your business on the open market. Just like with selling any other large asset, you should always consider working with a professional broker or business valuation expert when selling your business, but it helps to understand the process and do a little back of the envelope calculations of your own.
Here are a few quick tips for getting a handle on how to value your business:
FIGURE OUT YOUR DISCRETIONARY EARNINGS
It's common small business practice to try to lower your tax bill by increasing your expenses, thereby reducing your profit margin (and by extension, your tax bill). But, when you're selling your business, those expenses can end up hurting your evaluation. So, the first thing you want to do is take all of those random expenses that will likely be cut by the new owners, and add them back into the revenue.
This has the dual benefit of increasing your profitability (thereby increasing your valuation), and giving the buyer a more accurate picture of the revenue and expenses of the business they will be buying. Ultimately, the buyer will decide how they want to operate the business, so it's possible the buyer may want to leave some of these expenses in the value calculation.
So, what kind of expenses can you add back? Here are a few common ones:
The salary of any owners that won't be on the payroll after the sale, as well as any personal expenses that might be on the books (personal vehicle payments, etc.);
The salary of any family members that won't be on the payroll after the sale;
One-time expenses that are unlikely to recur after the sale of the business.
ADD UP YOUR ASSETS
If you have assets for the business that will help the new owners to continue to operate the business after you're gone, then tally them up and include them in the value.
Oh, and don't forget to do the opposite and subtract any outstanding liabilities that'll be hanging around after you've split.
USE INDUSTRY MULTIPLIERS
Every industry has a different way that potential buyers evaluate the purchase. For tech companies with a high growth potential, the multiplier might be 8 times EBITDA. For smaller companies in mature industries, the multiplier might be 2-3 times EBITDA. And sometimes, the multiplier is even based on gross revenue. Some of the factors that go into determining the industry multiplier are:
Independence from the owner;
The maturity of the business.
In the end, determining the best price for your business is more of an art than a science, and comes down to what a buyer is willing to pay for it. Similar to selling property, the market for different types of businesses can wax and wane based on how in-demand the industry is. It can be a good idea to hire a professional to help you secure a buyer and navigate the sometimes complicated waters of business acquisition.