This is likely one of the very first questions you’ll ask yourself when you consider selling your business. It can also be one of the most difficult to accurately answer. No two businesses are the same, and what your business is worth will be as unique as what you have built.
It’s essential to have a realistic understanding of what it is you have to sell and how valuable it is. Naturally, you want to maximize your value when selling. It’s important to ensure you do so without over-valuing your business and pricing yourself out of the market.
At the end of the day, the correct asking price is about generating serious buyer interest. A business that is astronomically overpriced will not get any traction on the market, and, ultimately, will not sell.
Business Valuation Methods
There are a number of valuation methods that can help you answer the question “How much is my business worth”. Your valuation will not rely solely on any one of these methods; rather, valuing your business will take all these approaches, as well as other factors, into consideration in order to create the most probable selling price.
- Income approach: This approach looks at historical revenue and accounts for potential future risks.
- Assets approach: This approach calculates total assets minus total liabilities.
- Market approach: The market approach compares similar businesses that have been recently sold.
Other factors that contribute to the overall value of your business are essential to consider. Your company’s position in the marketplace, future growth opportunities, operations, revenues, expenses, strengths, weaknesses, and profitability are all elements that will inform you and any serious buyer about what your business is worth.
It can be helpful to enlist the services of industry professionals, such as accountants, business brokers, and investment bankers, to help you estimate the value of your company by analyzing all of these factors.
Income Approach - EBIDTA
Earnings before interest, taxes, depreciation, and amortization— or EBIDTA—is commonly used to measure a company’s financial performance. This number calculates the simple net income of a business and showcases its ability to generate earnings from operations. EBIDTA-centered business valuations are then based on a multiple of the EBIDTA; that multiple can vary greatly according to industry, business size, market conditions, location, and a number of other factors.
But how this helps me answer the question of how much is my business worth? Generally speaking, small- to medium-sized businesses tend to be priced between three and five times the EBITDA. While this range does not represent all small businesses, companies that experience exponential growth often sell for more, and distressed firms typically sell for less. This range does apply to many companies in traditional industries with established, consistent business models and moderate growth.
The income approach doesn’t tell the whole story about your business, but it’s a helpful metric to guide you when valuing your company.
Income-based figures can then be compared to or influenced by your business’ assets and liabilities. Assets may be tangible, such as owned property, inventory, and supplies, or intangible, such as patents, copyrights, or other intellectual property. Liabilities include unpaid debts, credits, accounts payable, or revenues that haven’t yet been earned.
Research the market: search recent business listings in your industry and location. How much are they listed for? Do those businesses appear to be in a good selling position? What are their revenue and profitability? Are they bigger than your company, or are they smaller? Keep in mind that these are only asking prices and that no two businesses are the same, so these metrics shouldn’t be the only thing influencing your pricing methodology.
However, these findings can help give you an understanding of what the marketplace looks like at the present moment, and how businesses like yours are performing in it when it comes to the sale process. A deep understanding of the current trends in the marketplace will help you come to a more informed valuation for your business.
So how do I value my business?
Consider your business: Look at your company’s revenue and profitability, and make sure these values are credible and supported by identifiable facts. Buyers (and their lenders) will need to see evidence that their potential investment is valid. Organize your financial statements: make sure your income statements and balance sheets are up to date.
Is the company’s profit growing? Is there anything you can do to increase the value of your business in the next year? What makes your business unique? What are your competitive advantages? Having clear answers to each of these questions will not only give you clarity about your business’ unique value but will also ultimately help you pitch to potential buyers.
Tresle has a number of tools available to help you manage the sale of your business. Search Tresle’s online listings by industry, price, and location for market research to learn what businesses like yours are listed for.
Tresle’s Business Valuation Calculator can also help you gain an initial understanding of what your business may be worth. The Calculator uses basic financial details (such as recent profits and revenues) about your business, as well as the current multiple in a given industry and region, to give you a valuation estimate.
Valuing your business is in many ways a numbers game: past financial performance is important, and offers will indeed reflect that performance. But it isn’t the only factor that will influence your final selling price. Buyers need to be able to see what the future holds for your business. Their excitement for the future of the business—for growth and expansion opportunities— is ultimately one of the most essential driving factors for buyers.
Think ahead: what contracts does the company have set up for the coming year, and how will they affect profitability? What will the company be able to achieve if it were to receive a large investment? These questions can help guide you in the process of setting an appropriate price—and give potential buyers something to look forward to.
Having a realistic vision for your business’ value and pricing it appropriately will ultimately help ensure that your sale process goes as smoothly as possible.