How to Value a Business? - The First Step

How to determine business value might be the most important financial question a business owner will ask themselves. Often this is a difficult question to answer because determining the value of a company can be a complex process. 

According to a BizBuySell insight report, price could be the biggest reason businesses are selling. The report explains that main driver of the increase in transactions could be that business owners were willing to accept lower prices than in previous quarters. While total closed transactions increased in Q1 of 2012, average sale price as a multiple of both revenue and cash flow decreased compared with the same period last year according to the report. The average sale price as a multiple of annual revenue fell over 10 percent to 0.59, the lowest since the financial crisis at the end of 2008. The average sale price as a multiple of cash flow decreased by 4.7 percent to 2.36. These falling multiples may point to business owners becoming more realistic about final sale prices. While median asking prices for sold businesses actually increased by $1,000, the median final sale price dropped 3.2 percent, from $155,000 in Q1 2011 to $150,000 in Q1 2012.

I (and almost all business brokers) suggest that one of the first steps to selling a business, or developing an exit strategy, is to find the value of the business. Valuing a business can be a complicated process. Many factors from revenue to market outlook and even customer concentration can factor into a business value. Growth opportunities, market competition and seller motivation are some other intangible factors that play a role in how to value a company. The most common growth potential considerations are new products, new services, industry growth as a whole, economic growth, vertical or horizontal acquisitions, new technology, proprietary processes or product development. Although the internet has many resources that explain how to value a business, getting assistance from a business advisory professional can be very helpful in navigating through the often complex business evaluation process.

Business brokers will consider both a sellers business’ earning power and its tangible and intangible assets to determine the value. How a deal is structured can also factor into the selling price and depending on who is buying the business whether a private equity group, strategic buyers, or high net worth individuals, they all have their own unique requirements.  

For a complimentary consultation:
Contact  Cecil Williams (cecil@bizbrokerflorida.com) or call  at 888-925-5055 ext.206.  Visit my personal website to search for business for sale in Florida www.bizbrokerflorida.com  Also, visit our Florida Business Exchange website at www.fbxbrokers.com