What Are the Best Methods for Determining the Real Value of My Business?
Updated: Aug 30
By Jim Kahrs
The first thing to understand is how value is typically derived. Several factors are used when potential buyers are looking at buying a business.
Net Profit History – Your overall profitability over the last few years is an important gauge of value. Most buyers will pay a multiple of annual EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), as it is commonly referred to. When figuring adjusted EBITDA you want to add back any personal and/or non-recurring expenses. These are things like country club memberships, personal travel, non-business expenses, non-recurring expenses, etc.
Recurring Revenue – Revenues such as maintenance contracts, machine rentals and supply sales add value to your business because they continue after the sale. If you want to maintain the value of your business don’t give away or discount your recurring revenue.
Customer Base – Your base of customers and the mix of products and services you’ve sold them has a big impact on the value of your company. If you have a base of strong products placed with good customers then your business value increases.
Employees – A large portion of the value of your business is based on the employees you have in place. Finding, hiring and training new employees are difficult tasks, especially in sales. Buyers are willing to pay more for the business if they see a strong staff in place.
Markets Covered – The territory that you cover can not only add to the value of your business, but it can also draw buyers to the table. Many dealers on a growth track will use acquisitions as a primary means for expansion. However, you need to cover the markets effectively. Buyers typically don’t pay extra for territories that don’t have customers.
Future Business Potential – Future sales are best predicted by past sales. However, there can be extenuating circumstances that will lead to sales in the future. If you have something on the horizon that will lead to more business be sure to document it during the evaluation process.
The best time to prepare for the sale of your business is at least three years before a sale. However, if you don’t have that kind of time, consider the ideas above to increase the value of the business. And be sure to have good help and advice from professionals in valuing your business, presenting it to buyers, understanding the tax ramifications and handling the legal aspects of a transaction. Buying or selling a business is a complicated transaction that must be handled properly to ensure a favorable outcome.
Jim Kahrs is a certified Value Builder.