What is my business worth? What is the value of a small business? How much money can I sell my business for?
These are all variations of the same question. What is my business worth when it is time to sell it? That is a loaded question.
Recently Pratts Stats a leading business valuation database released information from their database about “retailers” valuations for the period from 1994 through 2014. The database contained 269 entries. Retailers varied from discount warehouse stores to hot tub retailers. Interestingly the database information is quite close to business broker rules of thumb. For most business sellers the valuations are disappointing. According to the data the median multiple of revenue is .42 times. The median multiple of discretionary earnings (all the ways an owner makes money plus depreciation and interest) is 2.21 times. The coefficient of variation for the revenue multiple is 5.47 while for discretionary earnings it is .72. What that means is that the discretionary earnings multiple is a reliable indicator and the revenue multiple is much less reliable. Namely, make money if you want to sell your business for a profit.
We are always available if you would like to have a conversation about the likely value of your business. Please remember though, the devil is in the details.
Harvest Business Advisors
Princeton, New Jersey and Columbia, Maryland
Gregory R. Caruso, Esq., CPA, CVA has been appointed President of New Jersey Business Valuation and Business Appraisal Association.
Gregory Caruso, Esq., CPA, CVA has been appointed the President of the New Jersey Chapter of the National Association of Certified Valuators and Analysts (NACVA). The NJ NACVA is a business appraisal and business valuation association dedicated to maintaining and raising the standards in the business valuation, business consulting, and expert witness professions. Gregory R. Caruso is a Principal at Harvest Business Advisors, Business Brokers, Business Exit and Succession Planners, and Business Valuators located in Princeton, New Jersey and Columbia, Maryland.
Levels of Value for Company Business Valuations and Appraisals, business owners who are thinking of selling their business or doing routine succession planning need to understand the value of their business. Often owners are surprised when they learn that company value, enterprise value, or business value found might be dramatically different depending on the situation. The value of the business is usually determined by what it is worth to others. From that standpoint, it makes sense that buyers in different situations might have different values. This is because different buyer types will be able to make different amounts of money (both theoretically and actually) from the business.
Want to know more? Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation”
Below I discuss Strategic Control Value.
In my next Post I will discus Fair Market Value and Minority Interest Fair Market Value. These are the main standards of value used.
Strategic Control Value. This value is the value obtained when 2+2=5. This buyer is often called a synergistic buyer. Namely the acquirer can obtain more value from the target than the target can make on their own. This can happen because of operational efficiencies or because of the ability to increase market sales with incrementally lower costs. The classic example of an operational efficiency is two delivery companies running the exact same routes. If they merge the combined entity should be able to deliver the same packages with substantially less trucks and drivers. An example of the ability to increase market sales is when a small software company is purchased by a larger one who has a sales force that is already established in the industry the software is designed for.
Studies have shown that operational efficiencies are more predictable than sales and revenue increases. For owners it is important to remember that while strategic buyers and strategic value exists in terms of day to day operations you must run your business as if you will own it forever without a strategic buy-out. If you can modify your business plan to court a strategic buyer without putting your day-to-day efficiencies and operations at risk fine but never put yourself in the position of only having one buyer or being inefficient with the hope of attracting one buyer.
In summary strategic control value is a high value that can only be met in certain times by certain buyers. It is worth calculating when you are going to sell and strategic buyers are a real possibility. It is not worth putting your whole company at risk for to obtain if it limits current profitability or future options.
Greg Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokerage, Company Valuation, Business Appraisal
Princeton New Jersey, Baltimore Maryland, Columbia Maryland
Specialty Contractor – Baltimore, Maryland
$1 M of revenue, $300,000 of cash flow. 60 year old business. Great website. Sell to homeowners and contractors. Smooth owner transition. Very reasonably priced. Harvest Business Advisors, Business Brokers, Contractor works in Towson, Timonium, Columbia, Ellicott City, Baltimore, Maryland. For more info, email Ed Davis firstname.lastname@example.org