A lot of things happen in the lifespan of a business that require making informed and strategic decisions. For example, as a business owner, you should know the value or worth of your business for a strong negotiation when you want to sell it, attract investors, or apply for a loan.
When you get a clear value of your business, it becomes easier to set realistic expectations and position your business in the market, enjoying long-term benefits.
In this post, we will discuss reasons for performing a business valuation and methods to calculate it. With this, you will get the best return on your investment.
Why You Should Know the Value of Your Business
Importance of valuation in scenarios such as:
- Attracting investors– If you know the value of your business, you can negotiate fairly for ownership and investment. It’s said that investors are more interested and committed to a business with a well-supported valuation.
- Selling the business– To sell your business, it’s important that you get a fair market price.. An independent third party business valuation lets you know its actual worth. Without this, you may sell your business for less than it is worth or, worse yet, ask too much and be unable to sell.
- Planning for growth— To grow your business successfully, you should know its financial condition. By valuing your business, you will know the financial health of your business and can decide strategically what and how to grow.
An example: An established IT service company requested a business valuation. The valuation report gave its owner insights into the company’s financial position and growth potential. This helped the owner in determining how to value the business and prepare the business for sale. Ultimately, they implemented action plans to address 3 high ROI focus areas and were able to exit the business 2 years later at a 45% higher price!
Four Proven Methods to Calculate Your Business’s Value
1. Book Value of Your Business (Asset-Based Approach)
Formula: Total Assets- Total Liabilities
The asset-based approach to calculating the value of your business is the simplest and most straightforward. Subtracting the liabilities of your business from its assets gives its current worth. The method is based on accounting principles and is preferred by businesses that have more assets than liabilities.
Pros:
- Simple and rooted in accounting principles
- Provides a tangible, clear view of your business’s current worth
Cons:
- Ignores current and future earning potentials
- Undervalues high-growth businesses
An example of an asset-based approach– When you compare a manufacturing company with heavy machinery and equipment with a service-oriented IT consultancy with fewer physical assets, the value of the former will be higher if the calculation is done on this approach.
2. Cash Flow Analysis
Cash flow analysis considers both the current and projected cash flows. The method lets you know how much cash your business is generating or expecting to generate in the future.
The calculation considers the incoming cash from sales or services and the outgoing cash through expenses, taxes, and debt obligations. The value gives a clear picture to investors about the company’s ability to generate consistent profits and stay financially strong.
Variations:
- Standard cash flow analysis- This refers to the short-term cash flow situation, preferably over the course of one year or quarterly periods. It considers the cash coming into and going out of the business. Examining cash inflows and outflows helps in determining the financial stability of the company.
- Discounted cash flow (DCF) analysis– Discounted cash flow analysis is one step further than standard cash flow analysis. DCF projects the future cash flows of your business over several years and adjusts them to your present value. This method determines the growth potential of the business.
Pros:
- Accounts for current and future earning potential
- Highly credible for investors and stakeholders
An example of cash flow analysis– When there are seasonal cash flow spikes in a manufacturing company, the DCF method is recommended. The result shows the profitability of the company across multiple years, giving a more realistic picture to potential investors in the long term.
3. Revenue Multiplier
The revenue multiplier method considers the current annual revenue of the business and its pre-determined industry-specific multiple. These two components are multiplied to give the result. The method is straightforward and quick in providing a rough estimate of your business’s worth, which depends on its top-line sales. The multiple depends on the market data and valuation of similar companies.
Key influencing factors:
- Industry trends, competitive landscape, and profit margins- The valuation of a growing business or one with high-profit margins is higher than other businesses. This is because the competitive pressure of the company is less, and success is sustained.
- Market potential and scalability– If the target market of a business is large and its operations are scalable, it will grow significantly and becomes an attractive choice for investors.
- Timing and speed of expected ROI– Businesses that promise a quick return on investments are preferred and prioritized by investors. The option gets better if the growth potential of the company is high.
- Strength of management and operational efficiency– A business with effective leadership and streamlined operations enjoys a higher value. The company’s management makes sure that it’s safe from any risk and that executions are consistent.
Pros:
- Quick and straightforward
- Provides a rough estimate
Cons:
- Lacks precision as there is no third-party validation
An example of revenue multiplier– If the annual revenue of a tech business is $500K and the industry multiplier is 5x, $2.5M will be the estimated value of the business.
4. Earnings Multiplier (Price-to-Earnings Ratio)
Formula: Price per Share (PPS)/ Earnings per Share (EPS)
The objective of the price-to-earnings ratio is to compare similar companies within an industry. The calculation depends on the earnings of the company. Preferably, the method is for businesses with shareholders or publicly traded companies.
Pros:
- Useful for comparing with market competitors
- Reflects profitability per share
Cons:
- Complicated for small businesses without publicly traded shares
An example of an earning multiplier: A B2B service company with consistent earnings prefers EPS. It compares the company to its competitors, highlighting how profitable and strong it is in the market.
Additional Factors That Impact Business Valuation
- Intellectual property (IP) – Intellectual property includes patents, trademarks, and proprietary technologies. Though they are intangible assets, they differentiate a business from its competitors and boost its value.
- Customer base– If the customer base of a business is loyal and recurring, its revenue is stable and predictable. This ensures no risk for investors and better relationships with the customers, meaning more value and profitability.
- Market trends– Market trends include macro or global and micro or industry-specific economies. Businesses plan and make changes according to market trends, helping them grow and make accurate investment decisions.
- Brand reputation– A business with a strong brand identity brings more loyal customers and market shares. These aspects increase the perceived value of a business and make it more appealing to investors.
When and How to Get a Professional Valuation
When to consider professional help:
- Considering an exit in 5 to 10 years– The time seems long, but actually, it is not. You should know how to value your company if you are planning to exit in the near future. A professional business valuation will help you identify areas to enhance its value, make changes, and maximize the sale price.
- Preparing for a major sale or acquisition– You need to prepare your business for a major sale or acquisition. With a professional valuation, you can set the right price to sell your business. It prevents you from underselling or overpaying and assists you in negotiations.
- Seeking substantial investment– Business valuation helps you determine the amount of equity in exchange for the investment and delivers confidence in the investors that they are getting a fair deal. The goal is the potential growth of the business.
- Determining key man insurance amounts– Sometimes, the death or disability of a key individual leads to a huge financial loss. To cover this loss, key man insurance is used. When valued professionally, the correct coverage amount is calculated as per the true value of the business.
- Partnership disputes or legal matters involving business value- When there are partnership disputes or any other legal matter in the business, business valuation is highly beneficial. The valuation report helps in determining the right value of the business and ensures that every party understands the worth of the company.
- Adding new business partners- Adding a new business partner means bringing new ideas and opportunities. With a professional business valuation, you will know the value at the time of the partnership change and help mitigate future partnership conflicts.
Tools and experts:
- Business appraisers– With their deep understanding of market trends and finances, business appraisers fairly and comprehensively value a business. They use standard methods for valuation.
- Financial advisors and valuation software- The valuation report is not enough. Financial advisors help business owners understand the report and make financial plans. They know how to price a business for sale. Several valuation software are used for valuation.
- M&A intermediaries– Specialized in mergers and acquisitions, M&A intermediaries help in valuing a business for sale or acquisition. The goal is to correctly assess the value of the company as per market and industry demands.
Costs:
The cost of a professional business valuation depends on different factors. Some common factors are the complexity of the business, the size of the business, the required valuation type, and the detail required. Keeping aside the upfront cost, the ROI of a professional business valuation is significant.
Conclusion
By now, you know the importance of a business valuation and the methods for determining the value. If you want to implement these valuation methods and better understand your business and its financial condition, connect with our M&A advisors and business brokers at Adam Noble Group.
We advise combining various valuation methods so that you get a comprehensive understanding of your business. You will know how to price a business for sale and take other steps for its future growth.
NOTE: The sale of a business is confidential and discreet; PLEASE DO NOT VISIT THE BUSINESS OR SPEAK WITH ANY EMPLOYEES. We know about many businesses that are for sale but might not be advertised. Check out www.adamnoble.com for more information and consider registering your criteria as a purchaser.
ALL STATEMENTS, FIGURES, AND VALUES ARE SUBJECT TO A PROSPECTIVE PURCHASER’S DUE DILIGENCE. THE INFORMATION FURNISHED BY M&A ADVISOR ABOUT THE BUSINESS AND ITS FINANCIALS HAS BEEN PREPARED BY OR IS BASED UPON REPRESENTATIONS AND INFORMATION SUPPLIED BY THE SELLER. ADVISOR HAS MADE NO INDEPENDENT INVESTIGATION OR VERIFICATION OF SAID INFORMATION.
For information, reference Texas Renovation-Rehab Multifamily Construction Services Business for Sale Business for Sale 20456 and contact Jeff Adam, PE, MCBC, FRC, CBB at Adam Noble Group, LLC
Phone: (817) 467-2161
Are you looking for a buyer? Search other buyers at SEARCH OUR BUYERS, email or call us to discuss your opportunity. It may fit another active buyer’s search criteria. Thinking of selling: Contact us TODAY to Sell your Business
For 3 decades, we have been guiding business owners and their families CONFIDENTIALLY to exit their construction trade business with the BIGGEST paycheck of their life!
KEYWORDS: apartment rehabilitation CapEx roofing gutter painting HVAC electric trade plumbing sewer concrete tile floor paint asset property management disaster recovery Sell my Multifamily Construction Services Business for Sale
During 3 decades of M&A service, Jeff Adam has successfully completed the sale of over 825 businesses and advised or completed 1,000’s of business valuations and exit plans. An entrepreneur in his own right, Jeff has started and grown 12 companies in fields including international finance, B2B services, business valuation, construction, screen printing, Mergers & Acquisitions, engineering, and manufacturing. Jeff has donated his time as a distinguished speaker at numerous national & international conferences since 1977 covering topics such as environmental services, engineering, media, craft breweries, exit planning, business valuation, charitable giving, management, business brokerage and M&A fields.
Jeff is President of Adam Noble Group, LLC, a national M&A Advisory firm, professionally valuing and confidentially selling profitable businesses owned by exit-motivated business owners to qualified strategic, corporate, private equity, partners, management, and first-time buyers. Jeff establishes rapport, builds trust, and educates business owners in the steps to meet their goals as they prepare and achieve the discreet, confidential exit of their business. Jeff exclusively represents sellers of $1M-50M value enterprises and endeavors to transfer their businesses to qualified, capable acquirers who will build upon the seller’s vision, goals, culture, and history. Jeff maintains lifelong repeat and referral relationships with sellers, their acquirers, and service providers.
Adam Noble Group has multiple M&A and business broker specialties: Manufacturing, Defense Industry, Oilfield services, Construction trades, Craft Breweries, Partnership Buyouts, Manufacturing, Service, and Wholesale Distributors.
Our M&A advisors and business brokers are all multi-industry entrepreneurs who have successfully exited their own companies. Jeff has walked in your shoes! Jeff wants to put the BIGGEST CHECK of your life in your pocket! Please contact Jeff, and he will confidentially answer all your questions.
Our GUARANTEE: a 15-minute call could REALLY change your future!