How much is my Business Worth?
Hello, on behalf of Florida Business Exchange, welcome to ‘How much is my business worth’. This is one in a series of videos from Florida Business Exchange that cover the basic steps you will encounter in selling your business. The first step in this process is finding out how much your business is worth, and what changes need to be made to get the optimum price when it comes time to sell. I'd like to thank you for your interest in working with Florida Business Exchange to help you sell your business.
The Florida Business Exchange Team is one of the largest business and commercial brokerage firms in Florida with over 20 intermediaries statewide. We have over 100 years of combined experience in business sales and consulting resulting in transactions worth millions of dollars annually. We represent a diverse number of qualified buyers including private equity groups and high net worth individuals. Our team is highly trained to assist you in valuing your business, preparing your business for sale, guiding you through due diligence and effectively and efficiently transferring your business. Our objective is for you to receive full value and peace of mind after the sale.
Now, back to exploring the Value of your business. There are many factors that control the value, but the actual value is what someone is willing to pay you.
The main reason a buyer wants to purchase your business is the amount Owner Benefit they can expect. Owner Benefit can be realized in many areas.
1) Cash Flow, or the amount of expendable cash they will have available for a salary, debt service, and profit.
2) Tax Benefits such as depreciation, amortization, and the ability to write-off dinners, trips, automobiles, and other expenses.
3) A third form of owner benefits are actual benefits such as health insurance, retirement accounts, or life insurance.
The more owner benefit your company can give to a prospective buyer, the more they will be willing to pay for it.
There are many wife’s tales told about what your business is worth. Some examples are:
Two times owner benefit plus inventory
100% of annual sales volume
40% of annual sales volume
Some industries do have general guidelines, but the truth is that every business and market is unique, like people, and need to be treated as such.
Every buyer is unique as well and each will have their own needs that need to be met before they will buy your business.
The most commonly used formula or guideline for valuing a business is the “Acid Test”
This simple formula has been around since businesses began and still holds water today, especially if the business has been consistent.
The acid test, in short, is the amount of time it will take for an investor or buyer to get a return on their initial investment after paying their new debt service with interest, and a good salary that is normal for that market.
There are other factors that can affect this test as well, such as large capital equipment assets, and changing market conditions.
Here is an example of the “Acid Test” for a common, consistent business.
YOUR COMPANY “Acid Test”
Probable Scenario:
Sales Price: $ 829,000
Down Payment: $ 400,000
Owner Financing $ 429,000
Annually
2010 Owner Benefit $ 301,624
Debt Service on $429,000 $ 75,205 (7years @ 6% = $6,267.07/month x 12)
Owner Salary $ 150,000 (Normal for this industry)
Annual Return on Investment $ 76,419
(It will Take 5 1/4 years to pay back the original investment of $ 400,000)
$400,000 ÷ $76,419 = 5.25 years
The time a buyer will require to receive a return on investment will vary
Notice: The purchase price is not the driving factor
Ask your advisor for a time frame that will work for your business
The owner Benefit of $ 301,624 dollars per year has been consistent and is sustainable in this industry. This is the driving factor that determines the price.
The Buyer and the industry required a 5 year return on the original investment. This business sold for 51/4 times the original investment.
The new Owner will have to get paid, so the normal industry annual salary of $ 150,000 has been deducted from the annual owner benefit.
The new debt service will cost the new owner $ 75,205 dollars per year for 7 years
The sale price of $829,000 is determined solely by what the business can afford. The purchase price is not determined by the needs or wants of the seller.
This test, more than anything else will determine the value of your business.
Many other factors can affect this formula, so you should ask for professional advice on what factors are prevalent in your industry and region.
Many sellers believe they have much more value in their business because they have built it up, worked it hard and should be rewarded.
This is true, and you will be rewarded, but only by what your business can sustain in the industry. If you have many large capital assets an upward adjustment to the sale price can be made for these. Likewise, if your large equipment investment no longer makes much money, you will have no choice but to just liquidate your assets.
Here are some other factors that will affect your sales price:
The ease someone can start the same type of business on their own.
New technology that has high growth potential
Amount of Competition
Industry Trends
The Level of Risk the buyer will assume
A professional intermediary will be able to help you navigate through your industry trends. Comparable listings and sales will also help.
Again. On behalf of Florida Business Exchange, I would like to thank you for listening. If you have any questions regarding preparing your business for sale, please do not hesitate to contact your Florida Business Exchange intermediary for a complimentary consultation. I wish you the best of luck in pursuing your after sale dreams, and having our team of professionals helping you through the process.
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CHRIS SAVAGE
813-784-4457
