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"Three Steps to Valuing
and Selling Your Business"
By George Matyjewicz, Chief Global Strategist
GAP Enterprises, LLC
We are often called upon to help clients in valuing and selling their
business. At one point we owned a business brokering franchise. We
always use our three-step approach.
Three Steps To Selling
Your Business:
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Contact your accountant, apply some numbers to
calculations and determine a potential value.
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Toss that in the trash and
determine what you want to get for the business.
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Then throw that number out
and negotiate. As with anything, it's a give and take thing - negotiation.
Somewhat funny, but true.
Valuation Methods:
There are many different ways to
value a business, i.e., cost-based approaches (book value, liquidation value),
market approaches using comparables (price to earnings, price to cash flow,
price to book value) and income approaches (capitalization of earnings, excess
earnings methods, discounted future earnings, discounted future cash flow).
Most importantly ASK YOUR TAX ADVISOR as to which is the best
way for you to value your business. It is not uncommon to get more for your
business, only to pay more taxes and end up with less in your pocket. And
let's face it, gross sales don't pay the bills - it's what's in your pocket that
counts!
Let's look at some valuation methods:
1. Multiple of Earnings
(or sales)
Earnings before interest and taxes is the standard earnings component to
which multiples are applied in determining business sale prices. If there are
no earnings, a multiple is sometimes applied to cash flow and even to gross
margin. Professional firms often use a multiple of revenue.
The going rate for sale of businesses is 5-7 times earnings. Consumer product
companies are selling for 8 to 10 times cash flow. Professional firms 1 to 3
times revenue paid over 2-3 years and adjusted based on client retention. Here's some sample
valuation guidelines:
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A very well-established and steady
business with a solid market position, and known brand, whose continued
earnings will not be dependent upon a strong management team. A multiple of
eight to ten times current profits.
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An established business with a
good market position, with some competitive pressures and some swings in
earnings, requiring continual management attention. A multiple of five to
seven times current profits.
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An established business with no
significant competitive advantages, stiff competition, few hard assets, and
heavy dependency upon management’s skills for success. A multiple of two to
four times current profits.
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A CPA firm with a retiring
practitioner. A multiple of two times revenue paid over two
years and adjusted at the end of the first year based on client retention.
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2. Book Value
Book value, a multiple of book value, or a premium to book value is also a
method used to value businesses. Book value is total assets minus total
liabilities and is commonly known as net worth.
For companies with sales under $20 million, this is often the preferred method
of sales, because of the departing owners’ many close relationships with the
company’s suppliers and customers. These relationships are tenuous because
they are usually non contractual and nontransferable. Such companies usually
sell at their book value plus a modest premium.
The buyer must also determine that all the assets are actually earning money
for the business. If they are not, he or she should request an adjustment in
the purchase price to reflect this condition.
The typical multiple is 5-6 times book value.
3. Discounted Cash Flow
Discounted cash flow is what someone is willing to pay today in order to
receive the anticipated cash flow in future years. The discount rate is based
on the level of risk of the business and the opportunity cost of capital. In
other words, it is the return you can earn by investing your money elsewhere.
The appropriate rate for discounting the company’s cash flow stream is the
weighted average of the costs of debt and equity capital. What is the rate of
return of your business and what am I willing to pay for future business based
on current performance?
Domain names have very little
value. In an article in Ecommerce Times author Jon Swartz notes that domain
names don't seem to have much value now-a-days. He noted that when market
leader Wine.com approached rival eVineyard about a merger in the summer of
2000, eVineyard balked. It wasn't as well known as Wine.com, the biggest
seller of wine on the Internet. But Wine.com was running out of money and
needed a buyer. "We waited until it withered away and then got a better deal,"
says Brett Lauter, chief marketing officer of eVineyard. EVineyard paid $9
million in bankruptcy court last spring for Wine.com's key assets. It got the
Wine.com name, its Web site, a list of 450,000 customers and an estimated $10
million in new revenue.
Not only did it get rid of its main rival, but eVineyard replaced Wine.com as
the biggest wine seller online. Revenue catapulted 450% to more than $15
million in 2001, eVineyard says.
Summary:
Each business is unique and has it's own charm,
strengths and weaknesses. Hence, each business has to be handled
separately. The most major stumbling block in every sale is the ego of
the sellers - they believe a business is worth far more that it is worth.
And the can't seem to understand that the inventory they have has no added
value (to the contrary, without inventory there is no business).
Good luck
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