Estimating the Value of a Business

Thumbnail descriptions of various ways to determine the worth of an existing business. November 19, 2005

Question
Iím trying to determine the value of my business. We have been in business for about 9 years and sales have steadily grown to around $220,000. I paid $170,000 for my equipment 8 years ago, so it should be still worth something. Any ideas on how I can determine the value?

Forum Responses
(Business Forum)
From contributor A:
The value of used equipment is the price it will bring at auction. Check Ebay for similar equipment.



From contributor B:
Auction price is different than the actual value of the equipment for valuation purposes. An auction price is a liquidation price. You will get a better idea of valuation by using a service like ExFactory or MMLS.


From contributor C:
I think the original questioner might be asking what his whole business is worth, rather than just the machinery. I don't know if there are any formulas for assessing the value.


From contributor D:
There are some rough formulas but they vary widely in their results. A CPA could probably give you the best guidelines. The last time we valued a marine based business, the value was the market value of real estate plus equipment plus three years net profit. That may or may not have any bearing on a woodshop.


From contributor E:
To the buyer, it all boils down to the basic investment question of how much return will result from the investment. If I invest $400,000 to buy your business what can I expect to earn over the lifetime of the investment as compared to alternative investments that I can make with the same money? A component of that question is the value of the assets. A savvy purchaser will want to know the orderly liquidated value as well as the fair market value. He will determine a comfort level number based on this information. Another consideration is good will, which is the buyer's belief that the business will continue to generate revenue as it did before and perhaps grow. The selling price is a usually a combination of the asset value and some value of good will. Other factors play a part, such as the present value of your receivables. A savvy buyer will ask you to be responsible for the payables and try to purchase your receivables at a discount; all of which is reconciled at the time of the closing. Inventory (both raw materials and work in process) will also be reconciled at the closing. If you are incorporated, the buyer will want to purchase your assets and leave you with the liability. You will have to legally close the company. If he wants to buy the name of your company - good will - you will have to license it to him.

In my experience, sellers are often disappointed by offers as their expectations are sometimes emotionally driven (I built this business up from the garage and now all they want to give me is enough money to cover used machinery). If you consult a machinery appraiser and your accountant, you can prepare yourself for a reasonable expectation and smooth sale. By the way, send notice of your willingness to sell to all of the accounting firms in your area. In my opinion, they are often the best source of potential buyers.



From contributor F:
A good rule of thumb is a multiple of EBITDA -(E)arnings (B)efore (I)nterest, (T)axes, (D)epreciation and (A)mortization. Here's what you can do:
Take your most recent years profit and add to that number the following items:
1. All personal expenses you ran through the business, if any - including any salary you took that could be construed as out of the ordinary.
2. Any extraordinary expenses you incurred last year (hurricane, etc.) that aren't likely to occur in the future.
3. The amount you paid in interest and principal on any outstanding loans (if any).
4. Any depreciation you recorded last year on machinery or equipment (if any).
5. Since you started the business, you probably don't have any good will on your books, but if you do, you'll need to add last years' good will amortization back in.

Total all of those items. Whatever that number comes to, figure that the business will sell for somewhere between 5 to 8 times that number. In other words, if your profit plus all of the add-backs total $25,000, you can probably expect to sell the business for $125,000 to $200,000. There are a ton of variables that could affect this, but that will give you a good starting point.



From contributor G:
Unless this is an operation that runs itself (i.e. your presence is not necessary for it to turn a profit) or you are planning on staying on for a while, the value would be only the value of the physical assets. Just because the current owner made a profit doesn't mean that anyone else could. How much of the business is dependent upon the current owner's skills and contacts?


From contributor H:
Double what you gross in a year, but be prepared to stick around and ease transition.