How Do I Determine the Value Of My Business? Or, The One I Want To Buy?

Comments & Replies: 6     Views: 12493     Posted By: Timothy Cunha JD  Timothy Cunha JD, Business Broker: San Francisco Bay Area

How do you determine the value of your business when you go to sell or even buy a business? There are so many factors and that is usually one of the first items serious buyers inquire about. When a business broker or agent goes to sell a business this should be one of the first tasks they perform.

Topics: Business Valuation, Buying A Business, Selling A Business     Tags: business valuation, buying a business, selling a business



Often, I'm asked, "Aren't all businesses worth the same multiple of profit or percentage of sales? Profit is profit, and a dollar is a dollar, right?"

To answer, I usually ask an absurd question: "Which is more valuable, the business that requires getting out of bed at 2 a.m. and driving through alleys of San Francisco collecting recyclable trash, that grosses $500,000, and nets $150,000; or, the business that rents out chairs and umbrellas on the beach in Santa Cruz on warm, sunny days, and also grosses $500,000 and nets $150,000?" Of course, the obvious answer is that the beach chair business is far more valuable. It's all about commitments of time and the lifestyle enjoyed by the owner.

And, that's what "rules of thumb" answer. How is this particular business or industry regarded by previous buyers? How did they value the gross and net revenue because of the type of business? With the right data, we can calculate the numbers and find the ROI, EBIT, EBITDA, "net cash flow", and "SDE"; but, only actual past human behavior indicates what those abstract numbers mean to real buyers.

Business brokers are very familiar with two typical ways of providing a quick value estimate for a small business, using comparable sales of similar businesses: (1) a percentage of gross revenues, and (2) a multiple of seller's discretionary earnings ("SDE"). These work fairly well at estimating a realistic fair market value range in the majority of cases, especially when the business is not all that unique and there are plenty of comps.

But, in those situations where the fair market value is more complex because the business is unusual or nonconforming and there are few comps, I use a variety of methods. One is to calculate the full replacement cost of the physical assets (adding 25% to cover sales tax, acquisition, freight, and installation costs), plus the cost to replicate the customer base, plus any cost to replicate intellectual property, plus a value on the time-to-market advantage of buying an existing company rather than starting from scratch. But, there are many other methods, with the ultimate purpose to determine the potential actual value of the business to the most likely buyer.

Contributor: Business Appraisals, Valuations Advisor

An ACCURATE business appraisal is much more difficult to create than most people realize. Rule of Thumbs and Comps are useless as they typically represent the average value of a specific type of business. In every class of businesses there are the well run and the poorly run examples. How do you know which end of the scale the business you are looking at ranks? Rule of Thumbs and Comps also do not address the asset value or the condition of the assets. Each business is unique and must be appraised as a unique entity.

ROI, EBIT, EBITDA and SDE based methods do not look at asset value and condition or market influences that affect value.

Percentage of gross revenues has little importance on a business s value. I once appraised a business doing $20,000,000 in sales with less than $200,000 in adjusted cash flow. Its appraised value was just over $300,000. Gross revenue is not a good indicator of business value. On the other hand, seller s discretionary spending is an important factor, but it doesn t present a full picture of the business s value.

Valuing equipment assets are never based on replacement value except possibly in an insurance claim. Fair Market Value based on the original purchase price is used by business appraisal professionals. This is 50 to 75% of the original purchase price depending on type, age and condition of the equipment. No other arbitrary additional cost can be associated with the equipment, customer base or business age.


Ultimately the "value" of a business depends on the benefit to be derived by the unique purchaser ... and that can vary from buyer to buyer. In broad terms, there are three kinds of buyers: the "career seeker", the "absentee (or semi-absentee) investor," and the "strategic player" (already in the business and seeking a marketing or operational advantage by acquisition). For each of these buyers, the "value" of the business may be significantly different.

Another factor to consider is how long the buyer intends to own the business. If it will be only a very few years, what the "market" says the business is worth is very important because it will face the market again in a relatively short time. If the buyer intends to hold on to the business for 5, 10, 15 years, and it serves the goals and purposes of that buyer, what the buyer considers its "worth" to be is far more relevant than the market's opinion.

Often, the prospective buyer needs to consider a "make or buy" decision--whether it is more economical to purchase a business than to start a business "from scratch." In my experience, it is almost always preferable to buy an existing (healthy) business. One of several criteria for making that determination is what it would cost to replace all the essential FF&E of the existing business; this is not for the purpose of valuation of those assets in an abstract or discrete sense, but rather for the comprehensive purpose of evaluating the relative merits of business acquisition versus business formation.

Contributor: Broker/Consultant: Elderly Care Services

I find it interesting that if I ask 3 different Appraisers to give me a value on a business, I will receive 3 completely different values. I agree with the Author that lifestyle, convenience, sustainability, and growth opportunities all play a role in value, but certainly make it hard to place a price tag on a business.


There are many factors that can affect a sales price, such as high rent, location, level of expertise that a new owner may need to properly run the business, etc. Working with enough buyers, I have found that most expect to receive a ROI with 2-3 years, and then want to make sure that they have enough time on the lease, so that they will be able to sell in the future.


Thank you for the great article. You are absolutely correct. In the end it comes down to What a Buyer is willing to Pay and a Seller is willing to accept. So, coming up with the comparable value is a basis. Most would pay more for the life on the beach, but both options need to be tested. The problem is of course beyond substantiating the numbers, which I see dominate most Buyers decisions. Unfortunately, this often leads to a rush of judgment. A business purchase, especially one with equipment or Lease dependent requires a great deal of Due Diligence in various areas, beyond the numbers. I also agree that unless a business is performing at Model Levels it should be looked at from all directions including, unit in place, sustainability testing, Lease conditions and competitive position and potential are all tests that should be conducted if one is diligent. Business Acquisitions absolutely fit the Message "Buyer Beware".


  Helpful Resources To Assist In Selling And Buying California Businesses
Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services In California

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Jim Saxton, Liquor License Broker & Consultant - SF Bay Area

20 years experience of local governmental requirements, such as Police Departments, Zoning / Planning Departments, and ABC District Offices, my company Liquor Licenses of SF Bay Area is very qualified to resolve all of your concerns during the liquor license transfer process. Call 925-787-0770 Cell.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Taj Randhawa, Business Broker Specialist - Gas Stations, Liquor Stores

If you are interested buying or selling a gas station, liquor store feel free to phone me for a consultation. My vast experience & specialization in gas stations & liquor stores helps me in serving my clients with full confidence, trust & sincerity. Serving Central Valley, SF Bay Area. 559-259-4247.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

Helen Yoo at New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Peter Siegel MBA, BizBen Founder, ProBuy, ProSell, ProIntermediary Programs

Peter Siegel, MBA - Founder Of BizBen.com (since 1994), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.

Steve Zimmerman: Restaurant Broker Specialist, California

Steve founded Restaurant Realty in 1996. He has personally sold/leased over 1000 restaurants, bars & clubs, & completed over 3000 valuations. The author of "Restaurant Dealmaker- An Insider's Trade Secrets For Buying a Restaurant, Bar or Club" available on Amazon. Reach Steve direct at 415-945-9701.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
6 Simple Things To Increase Business Value Before Offering It For Sale

How do you value a small business before putting it on the market? Tim Cunha, JD offers 6 items all business owners should consider. Other advisors and business brokers also weigh in on this very important topic especially when over 70% of small businesses never end up selling (due to pricing).

BizBen Podcast & Webinar: Business Purchase Financing And SBA Loan Options

Ever wonder what is involved in obtaining business purchase financing to buy a business or franchise? Peter Siegel, MBA who has over 25 years advising on all types of financing for business buyers in this BizBen Podcast & Webinar - SBA loans, Non-SBA Financing, Alternative Financing Sources.

How Do I Determine the Value Of My Small Business? Or The One I Want To Buy?

How do you determine the value of your business when you go to sell or even buy a business? There are so many factors and that is usually one of the first items serious buyers inquire about. Tim Cunha JD (SF Business Broker at 650-600-3751) initiates this Discussion On BizBen with other Advisors.

Business Purchase Financing Expert Peter Siegel - Tips On Proving Cash Flow

What are the actual "provable" adjusted net earnings (cash flow) of a small to mid-sized business being purchased? Buyers need to look carefully at all financial info for the "real" adjusted net income/cash flow. Peter Siegel, MBA (BizBen ProBuy & ProSell Lead Facilitator) at 925-785-3118 explains.

8 Tough Questions You Most Likely Will Be Asked When Selling Your Business

When selling your small business, you'll be bombarded with questions - from the brilliant to the ridiculous. You need to be prepared. Here are some of the key questions you can expect to be asked. Tim Cunha (SF Bay Area Business Broker at 650-600-3751) reviews many of these possible questions.

Getting An SBA Loan To Buy A Small Business: Dispelling Some Major Myths

When seeking SBA loan financing many potential business buyers have wrong information about the process of securing the best financing to buy a business. Peter Siegel, MBA (at 925-785-3118) a business purchase financing expert delves into the myths and facts regarding SBA loan financing.

Purchase A Small Business With Limited Or No Cash: Financing Tips For Buyers

Purchasing a business with no money down can be difficult, but not impossible. Financing a business purchase or down payment can often be accomplished with these strategies offered from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) in this post.

Thinking About Selling A Small Business? Know These 8 Factors That Matter

The likelihood of selling a business is often determined by external factors in the marketplace. Here are 8 influences on how easy, or difficult it might be when selling a small California business. Peter Siegel, MBA at 925-785-3118 (BizBen ProSell Program) explains these factors for owner/sellers.


Tim Cunha Business Brokerage
Chuck Post Laundromat Industry Expert
Escrow Services Diane Boudreau-Tschetter
Michael Brewer, ABC License Consultant
Facebook
Twitter
Linkedin
Vlogs and Podcasts
Advertise On BizBen
BizBen Blogs And Articles
Instant Email Alerts On BizBen
New Postings Reports On BizBen Sign Up
Business For Sale California Stats
California Educational Events Buying And Selling Businesses


BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 Dublin, CA 94568 © 1994 - 2021, All Rights Reserved


New Info Daily:   Facebook   Twitter   Linkedin   Vlogs and Podcasts



500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Purchase A Small Business With Limited Or No Cash: Financing Tips For Bu...
Read More News
Business Purchase Financing Expert Peter Siegel - Tips On Proving Cash F...
Read More News