What is your business worth? The short answer, of course, is whatever someone will pay for it. The longer answer is: it depends. It depends on your industry, it depends on your profitability. It depends on a multitude of factors. One of the valuation techniques being taught by the International Business Brokers Association is called the Multiple of Discretionary Earnings Method. It consists of 10 value drivers, each given a weighted score, that when combined estimates the multiple of earnings that a business would be valued at. These drivers include historical profitability, income risk, terms of sale, the business type, historical growth, location, marketability, desirability, competition and the industry.
Often times a business owner will over value their business. Sometimes they are disappointed, thinking the business was worth much more. I remind them that they have been receiving payback all along. In exchange for the hard work and long hours, the business has provided for their families. It paid for vacations and helped send the kids to college, and it provided for the purchase of houses and cars. The business worth is not only measured in the amount it sells for, but also in all of the benefits that came with business ownership. At the end of the day the business will be valued in a calculated, methodical manner. A premium will be paid for attributes your business has that exceed the norm and if you are lucky someone will pay even more for reasons of their own. After carefully explaining the valuation process and walking the business owner through the valuation techniques, it becomes clear to them that business value is driven by many different factors. To increase business worth, a prudent business owner will work on improving those value drivers that are within their control.
Steve Barnett has broad-based experience in small to middle market advisory activities. Prior to becoming a Business Broker, he served as CFO, Controller and VP Finance of both Manufacturing and Professional Service Companies with expertise in the Aerospace, Consumer Products, Banking and Staffing Industries. Known as “The Valley Business Broker”, Steve serves Los Angeles and Ventura Counties. Visit Steve’s website at www.TheValleyBusinessBroker.com.