What is My Business Worth

Determining the value of a business is often a complex task and is best done by either a VR professional business intermediary or a qualified business valuation analyst. Before one can determine the market value of a business, the financial information (profit and loss statement and tax returns) usually has to be recast to reflect the true earning power of a privately held business.

The recasting of financial statements provides buyers with a common baseline, Discretionary Earnings (DE), to compare earnings from different businesses and calculate the potential earnings after acquisition

What Is Discretionary Earnings or DE?

Discretionary Earnings is a measure of the total financial benefit accruing to the owner of a business.

A simplified DE calculation would be:

                                      Pre-Tax Net Income

                          +          Owner’s Salary

                          +          Discretionary Expenses

                          +          Non-Cash Expenses (e.g. Amortization & Depreciation)

                          +          Interest Expense

                          +          Non-Operating Expenses

                          =          Discretionary Earnings

1.      Cash Flow Method

A multiple of the annual Discretionary Earnings. This multiple can vary widely depending on the business, the economy and the industry trend.

2.      Asset Method

A combination of “Furniture, Fixtures and Equipment (FF&E), the inventory and a multiple of Discretionary Earnings (DE).

3.      Gross Sales Method

3- to 12-month gross sales; again depending on the business, the economy and the industry trend.

4.      Comparable Sales/Market Method

This method compares sales of similar businesses and also the valuation multiples from these acquisitions. An adequate number of comparable companies are necessary to produce credible results.