Valuing Your Business

Rules of Thumb = Rules of Dumb

Many times I am asked to give a business owner a ballpark figure for the value of their business. Rules of thumb may be valid for some purposes but a business valuation can only be realistic if it is thorough and defensible.

Business value is primarily driven by earnings. Are earnings shown on the corporate tax return? NO!! Are we looking for Owner Benefits, Discretionary earnings, EBIT or EBITDA? This is a most important number and should be understood and fully documented.

Can I do a business valuation from the 2018 tax return? NO!! If I am looking at two similar businesses with similar earnings are they worth the same? What if one doubled sales in 2018 and the other reduced sales by 50%? Are they worth the same? Surely not. Trends can be very important. Any valuation worth considering will include at least three years of financial data.

What if we have two businesses with identical earnings? One relies on a single customer for 50% of their revenue. The other has a long customer list with no customer representing more than 10% of their revenue. Is the risk the same for each of these businesses? Should the price be equal?

What about the business valued at $1 million. Is an owner’s 25% share worth $250,000? Not according to IRS and other appraisal professionals. There is a discount applied for lack of control and lack of marketability. These discounts can be substantial.

The value of a small business can vary widely depending on all of these factors. Any realistic valuation will take into consideration the positives and negatives. Circumstances can change monthly through out the marketing period and valuations should be updated.

The business valuation is a most important step in establishing the Most Probable Selling Price. If the initial asking price is too high, qualified buyers will not even start the inquiry process. If it is set too low, you will be leaving money on the table.

If you are thinking of selling your business today or in the next five years, you should speak to me about a valuation. Often, while going through that process, we identify steps that can be taken to maximize the value of the business.

Call me today at 407-869-6446 for a FREE, thorough and defensible Business Valuation.

Find out what your Business is worth

Goldcrest Commercial Business Consultants, Inc.

Buy or Sell an Orlando Business: 407-869-6446

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