What Is My Business Worth?
By: Justin Farmer
A fundamental question we are often asked is, “What is my business worth?” When you get into that question, we need a lot of information to give you exactly what we think your business is worth. If you are looking to sell your company, looking to find a value, there are 3 things that a buyer and a banker would look at, and that an appraisal company on the banker and buyer side would perform their analysis based upon.
Factor # 1: Gross Revenue
You are looking for trends on gross revenue as your top line; how does your business perform year over year? Also, you are looking at a 3-year snapshot generally, to look for those trends. If you see growing revenue, that’s a good thing. That adds a higher multiple of gross revenue. We will get into the kind of multiple ranges later.
Factor # 2: E.B.I.T.D.A
This acronym stands for Earnings Before Interest Taxes Depreciation Amortization – that’s your net income with some adjustments.
Factor # 3: Seller’s Discretionary Earnings
You’re also looking at the seller’s discretionary earnings, which is E.B.I.T.D.A plus owner compensation.
There are certain rules of thumb when you are valuing a company to determine what your business should actually be sold for. We’re looking at what the value is and your price value. They’re not all created equal.
Generally speaking, the most important factor that a buyer is really going to look at (along with the trends, you obviously want to see positive trends) is profitability, cash flow, the return on investment. If you flip it around, normally someone who is going to buy your business wants to look at the cash they’re going to take out of it (that’s the earnings) and they will question what is their return on that investment, how long, how many years will it take to repay the purchase price. That’s what a return on investment is. Depending on the buyer you’re talking to, they want to see a 3, 4, 5x return on their investment.
You’re going to have some buyers who are going to pay 3 and 5x E.B.I.T.D.A. for a professional service company. Here’s an example:
Let’s say that your business has a gross revenue of $1,000,000 USD and you are taking home $500,000 dollars in profit, your E.B.I.T.D.A. without making adjustments is $500,000. A buyer would look at that and say, “Okay, I can make $500,000, all things being considered,” and they’re willing to multiply that number by 3, 4, 5x depending on your type of business. That’s the general rule of thumb and again, there’s checks and balances. You look at gross revenue against some other things, but that’s just one example that I like to give, as it’s a nice round number you can kind of gage against, and ask what your business is and how much money you are taking out of it.
You own a physical therapy practice, and your gross revenue (your billable) is $1,000,000 USD each year, and your profit (net income) is $500,000 a year. Currently, as the market is today, a buyer would look at that and think, “I’m willing to pay $500,000 x 3 = $1.5 million up to x4= $2 million.” So this means somewhere, between $1.5 and 2 million for your practice. That’s what we call a multiple.
Keep in mind that every industry is different: A widget factory sells differently than an ice cream shop which sells differently than a physical therapy shop, which is different than a CPA practice. We can help you figure out what your multiple is for your business and your industry. Give us a call if you’re interested in learning more about our valuation services. We do opinions of value and we’re happy to tell you what we think your business is worth.