What Is My Business Worth?
What Is My Business Worth?–That is the age-old question business owners ask themselves every day, especially when times are tough. The simple and accurate answer is “it depends.” The value of a business is dependent on a number of complex issues. Some of the most important factors when determining a value of an enterprise, are the purpose of the value, the basis of value, and the premise of value.
At White Nelson, we perform business valuation services for many purposes, including the following:
- Mergers and acquisitions
- Company buy-sell agreements
- Gift and estate tax transactions
- Income tax transactions
- Fairness opinions
- Transfer of ownership and compensation issues
- Generally accepted accounting principles (GAAP) compliance
- Charitable contributions
- A myriad of other reasons
As far as business valuation is concerned, at its foundation is the basis of value to be used. The basis could be (1) fair market value, as defined by the IRS or international business valuation definitions, (2) fair value, which includes most states’ statutory value definitions and financial statement GAAP’s definition, (3) contract value, or (4) strategic / investment value. These definitions can be quite different from each other, and knowing the differences in each is important.
The one value that most business owners are concerned with is the amount of money they would receive if they sold their business. Again, the valuation amount will vary depending on factors such as size, profitability and financial stability of a company; the industry in which it operates; and the type of business (manufacturer, distributor, service organization, etc.). Also, the terms of a sale, such as for cash or stock, affect the selling price, as does the type of potential buyer involved in the transaction.
Many business owners hear, normally secondhand, that the business is worth a range of X times pretax earnings or X times EBITDA or fair market value of assets plus a goodwill amount. Most owners believe that their business is always worth the high end of the range, regardless of the condition of the business. While the number that comes out of this formula may look good, in reality, it will be tough to ever get an offer that matches it. Business sales are complex, and most smart buyers are able to uncover a company’s risk factors and adjust offers accordingly.
Two Important Factors
Two of the most important factors that determine the amount an owner will receive for a business are (1) who the potential buyer will be and (2) the terms of a sale or transfer transaction. Strategic buyers are usually in the same line of business as the seller and normally are willing to pay more for a company than financial buyers, who are investors looking for a rate of return and typically less involved in the acquired business. The strategic buyers will normally gain an economy of scale, which is not available to the financial buyer, and will gain market share or a competitive advantage from the acquisition. For most business owners, the sale of their company to a strategic buyer will normally be the easier transaction and net them the most money, as the buyer is already familiar with the industry. Also, whether an owner receives all cash, carries back a note, negotiates an earn-out, or receives common stock in a merger transaction will greatly affect the price that will be received. Each type of transaction and the associated terms have more or less risk for a seller and buyer and risk always is evaluated when determining price.
In seeking to supply insight on business valuation, we have likely given you more questions than answers. Business valuation concepts are far too complex to cover in a single article. If you have questions, we are available to discuss your particular situation and further explain the intricacies of business valuation principles. Email our office at [email protected] or give us a call at 714.978.1300.