SMALL BUSINESS OWNERS: HOW VALUABLE IS YOUR BUSINESS? - Aspira Financial

 

Thinking of selling? Or just curious to know the value of your business in case you do decide to put it on the market at some point?

Many business owners are well-wide of the mark when placing a value on their prized asset. They overvalue it and under-prepare for their exit, believing in a huge potential for their business that buyers unfortunately don’t see.

Your business is only worth what someone is willing to pay for it!

Having an inflated price fixed in your head can seriously hold up your exit strategy. Awareness of the factors considered in determining business value will help you avoid nasty surprises when you do take the plunge.

Some factors are obvious; others not so. Some you have control over; and others you don’t.

Understanding what influences business value enables you to take informed actions to increase it in the coming months or years.

Below is a boiled-down guide to ten of the most important considerations…

1. Reasons for selling

Why are you selling the business? If you’re forced to sell (and this is known by the buyer), the value of the business naturally falls.

Selling due to owner illness is a good example where you are in a poor bargaining position when it comes to selling.

Try to give yourself as long as possible to negotiate before you sell; rapid, forced sales will ultimately be detrimental.

2. Size of business

With all other things being equal, smaller businesses are often viewed as higher risk than larger, more established companies.

The very fact that the business has more employees and generates higher revenues may be seen as a sign that it is strong. After all, it must have survived difficulties in the market in the past and possesses the people and processes that have created an environment for growth.

A larger business tends to indicate stability — and prospective buyers like to see this.

3. Longevity of the business

How many years has your business been operating?

While potential is a very important factor in determining value, so is a strong track record over many years.

If you can demonstrate years of strong performance, steady cash flow, and an established loyal customer base generating stable recurring revenues, you are ticking many potential buyer boxes.

Businesses that have been trading for a year or two are far higher risk, even if they are performing well. They may be simply riding the market or a particular trend.

4. The nature of your business’s assets

If you run a manufacturing business, your tangible assets are much greater than most office-based businesses and this is a factor in its value.

If everything else is equal, building ownership, hardware, machinery, and stock make a business much easier to value than one where intellectual property is the main asset.

In reality, the value of a business depends upon many other factors that office-based businesses may score well with (such as customer loyalty, IP, brand strength, etc.)… so this factor needs to be balanced against the others mentioned here.

For a simple ‘asset valuation’ of your business, add up the tangible assets, subtract the liabilities, and that’s it!

5. The key financials: EBIT

What are your business’s earnings before interest and tax (EBIT)?

Any prospective buyer will want to know this figure as the most common basis for calculating the value of a business.

It essentially puts a figure on your profit. This includes all the expenses in the business, except interest and income tax expenses.

Another way to put it is: the difference between operating revenues and operating expenses.

A multiple of EBIT is a common method of valuing a business. For example, a 3 times EBIT multiple for a business with an EBIT of $400,000 gives a $1.2M valuation. Or a 5 times multiple on an EBIT of $500,000 gives a valuation of $2.5M.

What is considered a ‘normal’ EBIT multiple to use for valuation purposes?

This will vary between industries and is affected not only by the factors listed in this article, but also by market sentiment. For example, in a ‘bull market’ when there are a lot of buyers, valuations are higher and a business could attract a buyer willing to pay a 10 times EBIT multiple. That same business within a different market environment, with a less bullish sentiment many only attract a 3 times EBIT multiple.

Clearly, timing matters.

6. Future performance & projected cash flows

While past performance can demonstrate financial stability (very important), it’s future performance potential that will get buyers’ eyes lighting up.

It’s important to be able to show growth potential. With this in mind, how well does your business attract new customers and boost cash flow?

Is it retaining customers effectively so that cash flow and revenue remain healthy — or are customers dropping off the back as quickly as new ones are loaded onto the front?

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