How Much Is My Business Worth?
It’s a good question and one that you want to spend a great deal of time and energy answering. The details matter. Accuracy matters. Facts, figures, and supporting evidence matter. As does maximizing your proceeds while also setting your business up for future success with someone else at the helm.
Buyers want an investment that they are confident will deliver strong returns. The more attention you pay now, the better it pays off as you proceed towards a sale. So… how do you begin to answer this critical question?
Selling Your Business: How Much Is It Worth?
When you own a business – when you have worked hard, sacrificed, and built an entity in which you take tremendous pride – it is difficult to be objective. This is an area where many owners have difficulty. How much to sell my business for? $1 million?! $2 million?! In reality, you may be playing in the six-figure ballpark.
The inverse can also be true. You might undervalue your business and its future earning potential. In this case, you risk losing out on significant proceeds, funds you need to fund the next chapter in your career and life.
It is clear, then, that an objective, independent, valuation is essential. It’s not about what the business is worth to you; it’s about what it is worth to potential buyers and in the market. An expert coming in from the outside isn’t caught up in emotion. They don’t care how many hours you put in when you first opened your doors or the day you hired your first employee or that you chose the flooring, furniture, or software system yourself. They deal with hard numbers in order to determine the true market value or worth of your business.
Valuing Your Business
One way to determine a baseline for your business’s value is to use a standard multiplier. In general (and it is important to recognize that this is, in fact, wildly generalized!) small businesses typically sell for two to three times their annual cash flow. For example, if your annual cash flow is $300,000, your selling point is typical $600,000 to $900,000. Again, though, many factors play a role in market value, so it’s more than a simple math problem.
Note: Businesses with cash flow of between $3 million to $20 million typically multiply by three to five times, and large businesses (cash flow $20 million or more), use a multiplier between five and ten to get a baseline for their market value. Again, we must emphasize that this is a generalization.
Another way to look at it: if your business is making money, the selling price range is typically the result of your earnings before interest, taxes, depreciation, and amortization (EBITDA) times a standard multiplier.
When it comes down to it, your business is worth what the market will pay. As we know in the residential sector, sometimes it’s a buyer’s market and sometimes it’s a seller’s market. The same is true here.
What If You’re Not Liking the Answer
If you are digging into your business’s value and what it might be worth on the market, what happens if you don’t like the answer? What if likely proceeds from a sale do not live up to your expectations? If assets and liabilities do not balance out favorably?
Take action now. You can implement strategies today that will make your business more valuable in terms of the market tomorrow. For example:
- Strengthen and streamline your bookkeeping and accounting processes. Work with a CPA and/or attorney with a CPA to get these critical functions in top shape.
- Focus on retaining the best talent you can. These are incredible selling points; if a buyer can come in with a strong team already in place, it makes your business that much more valuable.
- Automate processes. There are many functions that can be automated (e.g. ticketing, data reporting, emails, applicant screening, etc.). This demonstrates that your business can function like a well-oiled machine.
- Pick the low-hanging fruit. In your examination, did you uncover areas that you can address for quick turnaround results? What about the fruits that are a bit higher up? Is it worth investing in a substantive change in order to boost your sales price?
- Shore up your market position. Can you ramp up marketing efforts to more effectively and efficiently reach your target audience? Branding is crucial when selling your business; this may be the time to work on it.
- Get help. Business consulting solutions may be the key to ensuring that you maximize your selling price and proceeds.
If the question of how much to sell your business for is weighing on your mind, contact AMB Performance Group. Our comprehensive, personalized solutions can help you reach your goals and proceed to the next phase of your life on a confident footing.