One of the most commonly asked questions from small business owners is “what is my business worth?” It is a legitimate question and one that every small business owner should be asking. The value of your business should be a driving force in your strategic decision making and operation of your business.
If your business has little value should you invest heavily into new equipment or technology? If you have a multi-million-dollar valuation should you be checking on insurance plans, key-man policies or succession planning? Building the net worth of your organization should be on the to-do list every day. How do you do that?
In most small businesses, the value of the business is based largely on the cash flow. The buyer invests the money to buy a business in anticipation of a return on that investment. The return on their investment is the predictable, transferable cash flow. Some businesses have patents, technology or real estate that can impact the sales price but the valuation will always start with the cash flow.
Most small businesses are going to be valued at between 3-4 times EBIDTA. That means that for every dollar you save in expense you are gaining 3-4 dollars in value. That $50.00 meal you have with the family cost you $150-$200 in valuation.
To determine the base number for cash flow is more of a science than an art. We are going to look at your tax returns and your net income. We can add-back the following items: owners earnings and associated taxes, interest, depreciation, owners insurance, interest, owners retirement funds and one-time expenses. On occasion, we can add-back auto expense, over market rent (if you own the building), and above market pay for family members. We can not add back personal expenses charged to the business.
To reach a value we will calculate true cash flow, look at revenue, understand your business model, develop a transition plan and look at comparable sales. We will also look at the debt service to profit ratio to make sure the business will meet bank requirements. Then we can produce a valuation.
If you would like to find out the value of your business please contact Vantage Business Brokers. We offer this free service to all business owners.