To determine the value of a business, a Business Broker needs to fully understand all aspects of the business. The Broker will interview the owner and ask many, many questions to gain as much insight into the business operations. The goal of the business owner is to show minimum profits so they pay as little in taxes as possible. But the goal in getting a higher sale price is to show a higher cash flow. So how do you value a company whose financials show little to no profit?
As a Certified Business Broker, it is our job to learn as much as possible about the business, especially when it comes to examining the financials. Our goal is to find out the true profitability of the company. A small to medium sized business will usually be valued by the Seller's Discretionary Earnings. This method is used to arrive at a realistic selling price and is based off the adjusted profit & loss statements.
These adjustments in the profit & loss statement consists of adding back the business's unnecessary expenses that are not essential to operate the business, such as the owner's health insurance payments, personal car expenses, one-time non-recurring charges, etc. These non-business related expenses are added to the owner's salary and the net profits to show the true profitability of the business.
Most small to medium-sized businesses use the Income Based method by using a multiple of the Seller's Discretionary Earnings. The value will usually be between a 1 to 3 times multiple of the discretionary earnings. This will give the seller a suggested asking price range. There are a lot more variables that go into valuing a business, and it's the brokers job to fully understand the business and to explain to the client how the value was formulated
But as I tell all my clients, regardless of how much a seller thinks his or her business is worth, or what valuation a broker comes up with, ultimately the marketplace will determine what the purchase price will be.
If you're thinking about selling your business, contact Certified Business Broker Robert Dean,CBB for a Free Consultation and Business Valuation. Call 310-793-6757 or email at info@BannerBusinessSales.com