What Is My Business Worth?
The Definition of Value: What a Buyer is Willing to Pay.
Since most small businesses are managed to minimize taxable income it becomes important to adjust the business’ financial reports to reflect actual cash flow the business generates. Seller’s Discretionary Earnings (SDE) is defined as net income before deducting the seller’s compensation and other expenses that a new owner will not have. And the SDE is commonly the number most frequently used by professional brokers in determining the value of a small business.
Depending on the business category determining the value of a business can be complicated. It is very different from valuing a home, automobile, or other tangible assets because a business’ value is far more dependent on intangible factors such as goodwill, intellectual property, and risk. Oftentimes a business owner might compare the value of his/her business to rumored sales prices of similar sold businesses. Beginning the marketing for sale of a business based on a faulty valuation could mean great loss to the seller like months of additional marketing time and tens of thousands of dollars less when it eventually sells. For this reason, it is highly recommended that you, as a business seller, use a well-qualified business broker experienced in doing many business valuations.
There are usually dozens of circumstances not seen from the surface that affect the value of a business. For example, a business whose owner(s) can be easily replaced are more attractive to buyers and sell faster than those that require more owner involvement. During a no obligation, strictly confidential consultation with a Biz-Sell Adviser, we will analyze the unique factors of value in your business.
- Prep these for our consultation meeting:
Most recent 12 month Profit & Loss Statement
List and amounts of owner’s perks
Summary of Lease and expenses (complete lease if necessary)
Marketing materials & Menus
Copy of Franchise Agreement (if applicable)
- When recasting financials here is what we are looking for:
Owner Salaries/payroll taxes
Interest on debt not remaining with business
Irregular professional fees
Owner’s perks – insurances, cell phone, travel/entertainment, auto, sport tickets, etc.
Expired equipment leases
Excess salaries paid to family members
Non-recurring bad debt
Discontinued product lines
- Positive Value Influencers
Long-term customer contracts
Reputation – Great Yelp reviews
Suppliers and vendor lists
Well written employee manuals
Location the business
- Reasons for selling for less than maximum value (or even not at all).
Unable to substantiate financials
Value based on faulty information
Bad advice from attorneys/CPA’s
Poor lease terms
Poorly timed sale
Seller chose wrong buyer
Difficult licensing process