What Is My Business Worth?

The truth is it depends upon a lot of factors many of which are within your control and some that are not. Ultimately, the market determines the value of a business and only after a business is marketed correctly, widely, and aggressively to a variety of  prospects and a deal is done, can you know for sure.  It really doesn’t matter what you think the business is worth or what a buyer or anyone else thinks. It’s the market that sets the price.

In order to get the best possible price and terms for any business, however, certain crucial factors play a big role and determine what the actual price is. 

• The Business must be packaged and presented properly. Remember, it’s the sizzle that sells the steak. No one does this better than VR First Coast.
• The best likely buyers must be identified and enticed. The business must receive maximum, but confidential, exposure. No one does this better than VR First Coast.
• Negotiations with several buyers in a controlled auction are crucial. Again no one has more experience with this than the principals of VR First Coast.

With this said, there are a number of  methods that are used to determine the likely value of any business. Most businesses are main-street or upper main street businesses. These are the large array of  businesses such as dry cleaners, restaurants, etc. that we all are familiar with. The primary motivation of the Owners of such business is to make a living. To them, the reason for owning the business is to have a job and often to work for oneself on his or her own terms. For many, this is the American dream. The valuation of such businesses is a multiple of seller discretionary income or owner benefit. SDC is defined as all of the profit, owner salary and other personal benefits that flow to the owner from the business. For example, if a business shows an annual profit of $100,000, the owner takes a salary of $50,000 and has health insurance of $10,000 and a company car of $5,000 then the SDC or owner benefit is $$165,000. The selling price of such a main-street business is almost always no greater than 3X SDC or in this case $495,000. more often it is in the 2X-3X SDC range –sometimes less.

Occaisionally, upper main street businesses get valuations above 3X SDC but rarely above 4X . This is true for a number of reasons one of which is that it becomes very difficult to finance such valuations under traditional Small Business Administration lender guidelines.

When a business reaches a significant enough size and complexity where it can afford a full time executive team to run it and it still has profit left over it has investment value and the deal and valuation method is a bit different.  

The valuation base changes from SDC to Ebitda (Earnings before interest, taxes , depreciation and amortization ) Ebitda is simply SDC with a deduction for a CEO to run the business in lieu of an owner /operator.  Since the salary to retain a qualified CEO to effectively operate a business is often at least $100,000 and an investment group will want to earn at least that much at the outset a company will usually need to have at least $200,000-$250,000 of SDC in order to be of interest to even the smallest private investor groups.

The Multiple for an investment grade company is generally higher than for a main street business as investors are seeking a return on their investment. There are no completely accurate formulas but in a normal market and for a company of average risk with minimal or modest growth our experience is that a 4X Multiple yielding an investor a 25% expected return is not unusual. Some companies can garner higher multiples of 5X-6X or even more depending on their market, their own position and growth prospects. Again, it’s the sizzle that sells the steak and given proper positioning and the right buyer anything is possible. The principals of VR First Coast sold an industrial products manufacturer for more than 6X Ebitda to a NASDAQ listed company that wanted to expand into a related market. We sold a consumer and medical products company to a Fortune 500 Company for nearly 10X Ebitda as it needed the Company’s products to round out its product lines in an important division.

As you can see valuation of a Company can be rather complex and depends on  great many factors. No one understands this better than the principals of VR First Coast and no one is better able to     use those to create sizzle for your business and get you the maximum value.