FB pixel
Business Valuation Explained

A Business Valuation Explained

The time has come to sell your business, and you want to know how much it’s worth. It is understandably difficult to know what you might be able to get for your business on the open market, without having a professional value it first. 

Can You Value My Business? 

At Green & Co. we get many calls from business owners asking, “Can you value my business?” and the answer is almost always, yes. We are happy to offer a completely free business valuation to people who are considering selling their business with us. You do not need to pay a broker or a CPA thousands of dollars to do this for you, as it is always included with our services.

The Importance of Getting Value Right

When listing your business for sale, it’s important to get your business’s value correct and your asking price right from the very beginning. The average business sale takes around 280 days to sell, and businesses that are priced correctly sell even faster. The majority of the businesses for sale will actually never sell, and much of that is due to the fact that they are unfortunately over-priced. 

How Does A Business valuation Work?

Valuing a business can be a complicated and time-consuming process, because every individual business and industry is so different. Depending on the situation, small businesses are typically priced for sale in one of two ways: multiple of owner benefit/discretionary earnings or based on its tangible asset value. 

Multiple of Discretionary Earnings 

Ideally, the last 3 years of business tax returns (or Profit & Loss Statements if you can’t provide tax returns for some reason) are recast, to add back in one owner's salary, personal expenses, depreciation, amortization, and interest. Once the recast is calculated, then we can see the true owner benefit/discretionary earnings. Discretionary earnings number is multiplied by its respective industry multiplier. Looking at comparable sales to find the multiple is the most accurate way to price a particular business, because they represent actual comparable sales. This multiple is a ratio of sales price to owner benefit/discretionary earnings.

Asset Value

The value of the business is based on the fair market value of the tangible assets that the business owns. If the business’s tangible assets are worth more than the multiple of the discretionary earnings, then the business should be sold based upon the market value of the tangible assets. The buyer is not paying for goodwill or any other intangible assets; however, in these cases, they are often included in the sale anyway. 

A Business's Value To A Buyer

A buyer will question whether or not an asking price is fair, so you want to be able to defend your asking price. At the end of the day, a business is only worth what a buyer is willing to pay, so the asking price needs to be justifiable and easy for a buyer to see the value in it. A common saying among business brokers is that buyers pay for the past, but they buy it for the future. Meaning that the value the buyer is paying for is based on the past monetary performance of the business, but they are buying this particular business because they believe it has a future or potential that they want to invest in. 

Curious about what your business’s value might be? We’d be happy to offer a free confidential valuation. Get in touch with us today to arrange a confidential chat.