Business Valuation 101

Selling your business can be an exciting experience. You have developed your service application, deployed the marketing engine, acquired the clients and reaped the revenue reward. Now you are looking for a payday. But what is your valuation?

Keep in mind that determining an appropriate price tag for your enterprise is more of an art than an exact science. There is nearly always someone for everyone and not necessarily for the mathematic sense you may believe. Consider the various reasons that an entity may acquire you.

Strategic positioning: to eliminate competition from the playing field

Cash flow posture: to bolster their sagging or growing income paradigm with your revenue blood stream

Income position: to jump into a productive and profitable concern and earn income right away

Acqui-hire: to acquire leadership, technology, or industry wise talent

Diversification: to add a comprehensive ROI mixture to an existing corporate portfolio

Asset harvesting: to acquire your hard or technical assets

Diversity in mandate will affect the valuation posture of the acquirer. A company that purchases your firm simply to get you and your tribe on board will pay quite a bit less than a traditional entity purchasing your entire brand with a hope of scaling your market position.

Therefore a effective equation for determining hopeful valuation is: X(OB)

X = Multiplier

OB = Owner Benefit

Once you determine these financial factors the end of the math is Business Value. The components are simple to calculate if the purchaser has a practical desire to scale your current enterprise. What to consider:

Pre-Tax Profit + Owner/Partner Salary + Perks (car allowance etc.) + Interest + Hard Asset Depreciation (less allowance for capital expenditures)

Imagine all cash flow stripped of expenses or deductions that simply won’t exist with the exit of the current ownership. This is the basic Owner Benefit. Other considerations could/may be:

• Contingent agreements: potential partnership(s) in cue that will generate cash due to the insertion of the new enterprise

• Asset liquidation: the income cropped from the sale of unnecessary additional assets

• Impending scale in income due to term agreements

As you add up the dollars you will get a hard figure. You have arrived at OB. Now it is time to predict the most accurate future. What will be the growth potential or strategic monetary value to the new owner if they keep the business over two, three or five years? This will be represented by a multiplier ie: "X". Standard multipliers range from 1 – 3 times OB, but can grow dramatically in emerging markets due to explosive client harvesting potential. When a vast market looms many owners are apt to tack on huge multipliers due to the fact that a like competitor has been accepted by the investment group conscious. This is not necessarily accurate for your business.

If your model and quantitative data supports massive scale then you may be able to garner like multiplier support but if you are too new in space and/or can’t clinically support your scale plan then you will fare better to temper your spirit and inject a more reasonable multiplier.

Once you have a sober and substantiated multiplier then do your math.

Owner Benefit: $560,000 per year

Multiplier: 3

3 ($560,000) = $1,680,000 valuation

After establishing your price tag, keep in mind that various types of buyers will raise or lower the price based on their acquisition mandate. Do they want your assets, team, partners, or your entire business? The quantity of OB and a reasonable multiplier will dictate your best chance for a great price and quick transaction. Target your prospects with strategy. Don’t waste your time with potential buyers that have a micro interest in your business unless you are in desperate need to get out of town quick with less cash than you are truly worth.