The single most important component of selling a business is the pricing. While one never wants to price the business too low, the number one reason that businesses don’t sell at all is that it is overpriced.
A few things to keep in mind regarding Valuations:
- There is no standard process for valuing a business. Although there are generally accepted methodologies, there will always be a degree of subjectivity involved.
- The Valuation of a Business is always based on cash flow – not revenue.
- If the business is not operating, i.e. there is generally no cash flow, then the value will likely be the market value of its assets.
- The value of the furniture, fixtures and equipment of a business (i.e. the machines, vehicles, etc.) is what they generate in terms of cash flow. That is, they are not valued separately – the cash flow of the business depends upon these factors of production or operation and the “value” is considered in a figure based upon the business’ cash flow.
Venture Advisors Business Sales and Acquisitions believes that a formal process for pricing a business be conducted for every business that we represent for sale. In fact, the first step in the sales process is to provide out potential clients with guidance as to the most probably price range for their business, which we refer to as a Broker’s Opinion of Value. It is just that – an opinion.
We have 2 formats of pricing analysis. One is prepared in house by our brokers and associates – free of charge, the other is prepared in conjunction with a partner – a professional business valuation firm certified by the American Society of Appriasers (ASA).
Our In House Pricing Solution – The Broker’s Opinion of Value
This type of analysis is referred to as a “market analysis,” where a price is derived from looking at the sales of other similar businesses. The underlying rational is that the market (i.e. recent business buyers) will intuitively buy a business for an amount that incorporates all of the various factors affecting the “value” of a specific business, such as: the competitive environment, industry trends, ease of entry, expertise, risk, etc.… We generally find that we can quantify this market pricing approach by evaluating the ratio of the sales price to cash flow. The cash flow figures that we use are referred to as Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) and “Seller’s Discretionary Earnings” (SDE). These are two measures of the amount of cash that a new Buyer is likely to see generated from operation of the business.
- SDE is generally considered the cash flow available to an owner/operator of a business.
- EBITDA is more applicable to investor type of buyers, with non-owner management in place to operate the business.
- Revenue under $2.0M
- Flat or consistent rate of revenue change for past 3 years, as well as projected.
- Availability of comparative sales data
- Asset sale
- Likely Buyer is Owner/Operator
Calculation of Value – Prepared by 3rd Party Valuation Firm
Venture Advisors Business Group has partnered with a business Valuation Firm to provide a formal business valuation. The firm is ASA certified and operates nationally, often in support of lenders – providing valuations required by the SBA for financing.
The final report is actually referred to as a Calculation of Value, designed to provide an approximate indication of value, based upon the performance of limited procedures. The report will include a full review and adjustment of the firm’s financial statements and/or tax returns, and an extensive questionnaire covering the firm’s history, industry, products, competition and potential.
The final report will specify a Fair Market Value – defined as “.. the price at which the business would change hands between a willing buyer and a willing seller ..”
Valuation methodologies include:
- Cost Approach
- Market Approach
- Income Approaches – with detailed calculation of the firm’s risk premium, discount and capitalization rates.
The final report includes:
- Economic and industry factors affecting the company
- A Financial analysis of the Company
- A reconciliation of the various valuation methodologies used
- A review of the final value and a test for reasonableness.
- A complex business, or any business with annual revenue in excess of $3.0M
- A business with a strong, or varied revenue forecast
- Where the likely sale is to a strategic buyer, Private Equity Firm (PEG) or sophisticated investor.
- While an exceptional value – there will be a cost. Call for more details.