What’s My Business Worth – The first question when selling my business
The first question I’m asked.
And it always amazes me that business owners don’t know what their business is worth because if they knew what it was worth to them, then they would have a better idea what the market may pay for it, or whether the business is sellable or not.
There are many different ways to value a business. Multiples of EBIT, EBITDA, Price/Earnings, Net tangible asset value, multiples of book value, capitalisation of earnings, net present value of future earnings or liquidation value to name a few. A lot of this jargon also in my view just complicates matters, because these methods can be manipulated by either party with ease. What one party sees as value will be too expense to another. I always answer this question with a question. What’s the business worth to you the owner.Read more
And when or more commonly if they can quantify that, I ask them what would they pay to generate that income each year. It starts an interesting conversation.
To accurately guess what the market will pay, because until we have prepared your business for sale, marketed it, obtained a offer, we truly don’t know what a buyer will pay for your business, it is worth sitting down and calculating what the business has returned to you over the last three years. To do this,
calculate the following:
•Total salary or owners drawings of the last three years. I like to look at the after
•Calculate the total value of benefits you’ve taken out of the business, i.e. the business class upgrades, the long liquid lunches, the Citylink and vehicles expenses.
•The hire purchase on the nice car the company underwrites for you.
•Calculate the average profit after tax the business has generated over the last 3 years.
Now add all that up. What’s the number? If you’ve calculated three years worth, then divide by 3, to
work out the average yearly return.
Now divide that number by 20%, 33%, 50% and 100% (or 1). That’s the range you may get for your business if we placed it on the market.
Another number to look at is the economic value of the business to you. Look at the last balance sheet you’ve got, or the most recent one from your accounting package, and add up your cash, receivables, inventory and fixed assets, (Ignore any goodwill or intangible assets for now).
Now subtract all of the liabilities you’ve recorded, creditors, loans, leases, etc. Add this to the average income you’ve taken out of the business over the last three years and the average profit. This figure in my view would be the absolutely floor price that you would accept.
It will look like this:
Key to this, is if we can increase the value of the total earnings that can be returned to the owner before placing the business on the market, then the chances of getting a higher sell price increases and actually selling the business increases. Alternatively, instead of straight selling the business, if we can increase the earnings of the businesses, then the chances are that the business can afford to pay for a general manager to take over the day to day operational headaches of the business, freeing you up to enjoy the return on all the hard work you’ve invested in the business.