Find Out What Your Business Is Worth

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If you are contemplating selling your business, the first natural step you’d take is finding out what it’s worth. And as you’ll find out, it usually is a tricky affair as there are no hard and fast rules for valuing a business. Luckily, we can learn a thing or two from the four common approaches business sellers and brokers use to value businesses. Here they are:

#1: Asset Valuation

Using this method, the value of a business is calculated as the total value of the assets minus the liabilities. In other words, what is the value of the assets if they were to be sold off when the business needs to be closed down? However, this method may understate the real value of your business since the fact that those assets have the potential to generate more income in the future is not taken into account.

Find Out What Your Business Is Worth

Here’s how the method works:

– Sum up the value of all assets tied to the business: property, inventory, cash, equipment etc.
– Sum up the liabilities, such as due payments and debts.
– Get your net asset value is by deducting the liabilities from the assets

For example, a plant whose assets amount to $600,000, with liabilities of $250,000 would be worth $350,000. But there’s an intangible factor which is not taken into account when valuing your business using this method. For example, the strategic location of your business, its reputation and brand recognition all add to its goodwill, which should really elevate the value of your business.

#2: Earnings Multiple (Profit Multiplier Method)

This methodsis probably the most commonly used. It is a calculation of the net yearly profits of the business, multiplied by a specified number, which is to be determined by the type of business, involved, growth potential, and other market factors.

The actual profit figure used is usually EBIT – earnings before interest and tax. That’s to say the gross revenue, minus expenses, before interest earnings and taxation. As an example, let’s say your business grossed $700,000, with business expenses of $500,000. The net profit will be $200k.

Find Out What Your Business Is Worth

But if you were directly running the business (and therefore entitled to a salary of, say, $60k) the profit will come down significantly. So whether or not you pay yourself this $60k, the buyer will still deduct it from your net profit, reducing it to $140k. This new figure is known as adjusted net profit. The assumption is that the owner of the business (or a manger, if hired) is also an expense to the business because of the standard salary required to pay him.

So in our example, if we take a 3X multiplier, the worth of your business would be (140k X 3) $420k. The method to be used depends on a number of factors, such as the type of business, projected growth, stability, risk involved, etc. It’s usually in the range of 1 – 5, with smaller businesses, service businesses and websites usually selling at the 1 – 2 range. More established businesses may sell at a 5X multiple or more. But then again, there are so many factors involved, so determining this number can get quite complicated.

#3: Capitalized Future Earnings

This method takes into consideration the profits being made and looks at the amount of time it would take the investor to get their money back. Simply put, we want to know the rate of return on investment (ROI) for the buyer.

For example, if the buyer wants a ROI of 25%, it means they’re hoping to recoup the money in 4 years (if the profits are projected to remain constant). So if your business is making a net annual profit of $1M, then they would buy it for $4M. The higher the risk involved, the higher the ROI expected. So smaller business with higher risks will be valued for less since the expected ROI could be as high as between 75% and 100%, meaning they’d sale at 1.5 or 1 times the yearly profits.

A simple representation of this would be: Average net profit/rate of return x 100. If the profit is $1M and ROI expected is 25%, the capitalized future earnings will be 1,000,000/25 x 100 = 4,000,000.

#4: Comparable Sales

You can estimate, to near accuracy, how much your business is worth simply by looking up the data of recent sales of similar businesses. You can check industry magazines, websites, or newspapers listing businesses for sale. Find out how much similar businesses have sold for (or selling for) and you’ll likely understand the range within which your valuation should lie.

Jolie Fulton writes for www.brokercorp.com. She help you sell your Internet business.