Business owners who are ready to sell their business will often wonder, what is my business worth?

This is likely the first question they’ll ask themselves since it is the most important; the value of the business determines how much they can obtain if they sell the business.  But, before you plug a couple of numbers into a business valuation calculator or base a business valuation on a rule of thumb such as a business’s revenue, let’s consider a few things.  Business valuations are complex.  No two businesses are the same.  A mistake can cost you hundreds of thousands, if not millions of dollars.  Is that worth it?

Rules of Thumb

If you’d like a few simple rules of thumb, do NOT start with a percentage or multiple of revenue.  Revenue, while necessary, does not ultimately pay the bills.  Other rules of thumb might be industry-specific, such as a multiple of renewal revenue in an insurance agency.  This is a dangerous way to value a business.  These rules of thumb might tell you what cash flow ‘should’ be, but what if the seller is selling products or services at cost or slightly above cost?  This increases revenue, but not cash flow.  Want to do it right?  Start with what the business earns in a given year.  Most business brokers would define this as Seller’s Discretionary Earnings or SDE, for short.  You can think of SDE as EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization) + Owner’s Salary (salary, NOT distributions) + one-time adjustments.  Most small businesses trade for 1 – 4 times their annual Seller’s Discretionary Earnings (SDE).  Why 1 versus 4?  What adjustments are included in SDE?  Is SDE the same as net profit (answer = no)?  These are the million dollar questions.  Most online guides are wrong.  You must know what adjustments are acceptable to buyers and the banks.  This is also where most business brokers go off the tracks.  Here at CGK, we know what is acceptable and what is not.

 

Most medium-sized businesses trade off of a multiple of adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).  Depending on the size of the business, the trends, and the industry, this is normally 2 – 5 times for lower-middle market businesses and 3 – 8 times for solid, middle-market companies.  When do we use adjusted EBITDA versus SDE?  What’s the difference between the two?  What adjustments are acceptable for these businesses?  What about multiple expansion or contraction during the business cycle?  You may say, “These numbers are backwards-looking, what about my future numbers?”  “What’s this ‘intrinsic value’ that Warren Buffet talks about?”   Do you see the problem with ‘rules of thumb’?  For a relatively inexpensive business valuation, especially compared to the money at risk, CGK Business Sales can guide you down the right path, so you can make an informed decision.  Can you really afford to make a mistake?

 

 

Multiple Approaches to Business Valuations

There are a number of different business valuation methods that are in use today, but three that any business owner will want to know about are the asset approach, the income approach, and the comparable transactions approach.

1Asset Approach to Business Valuation

 

This business valuation approach is done by determining the values of the assets and liabilities for the business. The liabilities are subtracted from the assets, and the difference is going to be the value of the business. This can be a great way to determine the value of the business if the business may not continue and needs to be liquidated, as it’s relatively simple to determine the value of all assets and liabilities. However, this doesn’t take into account things that are valuable to the business but that don’t have a price that is easily determined, such as intangible assets. In general, the asset approach is usually not used for businesses that will remain as a going-concern, though it can be a baseline figure.
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2Income Approach to Business Valuation

 

This method takes into account what the business will make in the future and discounts this amount back to a present value. Examples of this approach include discounted cash flow and capitalization of earnings methods.  For instance, in the discounted cash flow (DCF) methodology, the future amount the business should likely earn is determined.  Then, a discount rate is applied to determine the terminal value and present sum of the business’s future cash flows.  This determines the current value of the business. Sound confusing?  It is.  A properly trained M&A advisor can walk a seller through this important way of valuing a business.  This lets potential buyers see how well the business could do in the future, plus allows for businesses with uneven cash flows to be properly valued.  The income approach is the theoretically correct way of valuing the business, so it cannot be ignored.  Though, predicting future cash flows is, of course, hard, especially when it comes to the cyclical nature of most businesses and economic cycles.

3Comparable Transactions Approach to Business Valuation

 

This is a common way to determine the value of a business. The business model is compared with similar ones that have been sold recently to determine the value of the business. This method takes into account the current market for buying and selling businesses, and is a common methodology for business valuations.  This method can suffer from peaks and valleys in different economic cycles. It can still be an effective way to market a business and is one that has often been used very often in the past to determine the value of a business before it is sold.  As part of the comparable transactions approach, many buyers and sellers may speak of market multiples, often valuing the business as a multiple of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for larger businesses or SDE (seller’s discretionary earnings) for smaller, main street transactions.  There are often adjustments made for buying the entire business, called control premiums, or discounts, for lack of marketability or size.  Which multiple is used and the adjustments made, either via add-backs or discounts/premiums, can make or break the value for a seller.
Frequently Asked Questions

Which valuation approach is right for you?

Business owners will want to make sure they take the time to learn more about the various approaches that can be used and work with a professional to ensure they find the right one to help them determine the valuation for their business to help them with a sale. A mergers and acquisitions advisor is going to be able to work with the business owner to determine which or all of these approaches is going to be the right ones to use for their business to prepare for a sale.
So which valuation methods are the right ones for your business and what are the differences between them? Speak with an expert business broker today to learn more about selling your business and about how to choose the right business valuation. This is an important step you’ll want to do carefully when you’re ready to sell your business.  Call or confidentially email CGK Business Sales below to determine the value of your business.
What They’re Saying

Excellent service. I was in need of a valuation for a possible acquisition. Greg was extremely thorough. All my questions were answered in a timely manor. I couldn't be happier with the results. Thank you for all you do.

Darin LaFonCGK Business Sales Provided a Valuation for This Buyer, Darin

Had an expert evaluation of my company. Greg was smart and up front with answering all my questions and concerns. Great service.

Nicolas RainesCGK Business Sales Provided a Business Valuation For Nicolas's Company

Greg did a excellent job . He explained us every detail about the valuation. We had no idea at the beginning, however, we learned a lot with his guidance. He answered all the questions and concerns. CGK Business Sales is one of the best valuation companies in DMV. They have great customer service .

Tuncer TurkerCGK Business Sales Provided a Business Valuation for Tuncer's Partner Buyout

I contacted CGK Business Sales to complete a valuation for my late father's business. They were extremely knowledgeable and turned around an accurate valuation in record time. They took the time to walk me through all items they completed so I fully understood how they landed on the final numbers. Also, I can't say enough about Greg. He played a huge part in me selling my father's company. He gave me invaluable contacts that were honest, forthright and experts in their fields. I would highly recommend CGK Business Sales, Greg and his team to family members, friends and people I do not know. If you need help do it right the first time and contact the right people. These guys are the right people.

Kristin ChaumontCGK Business Sales Provided a Business Valuation for Kristin's Family Business
Greg Knox, Managing Principal, CGK Business Sales

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Greg Knox, MBA, CFA has spent his 20+ year career in investment banking, private equity, a multi-billion dollar hedge fund, and institutional trading, at such institutions as Deutsche Bank, T. Rowe Price, and Wachovia... (click Greg's picture to read more)

Derik Polay, Managing Director, CGK Business Sales

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Derik Polay has over twenty years of experience in distressed securities and mergers and acquisitions and seven-plus years of upper-management positions at small and middle-market businesses. Derik’s previous ... (click Derik's picture to read more)

Eric Lewis, Managing Director, CGK Business Sales

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Eric Lewis has over 17 years of experience in the financial industry. He has worked for a breadth of companies ranging from investment banks to proprietary trading firms. Following his MBA at the University of Chicago, Eric... (click Eric's picture to read more)

Jason Clendaniel, Managing Director, CGK Business Sales

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Jason Clendaniel has been in “business” since he was seven years old. Whether mowing lawns, or delivering papers, Jason learned business from the ground up. After graduating from the United States Naval Academy... (click Jason's picture to read more)

Matthew Mistica, Managing Director, CGK Business Sales

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Matthew Mistica has 13+ years of experience in finance and entrepreneurship. Matthew spent 7 years in Corporate Finance working for Chevron and Shell Oil. After his MBA at the University of Houston ... (click Matthew's picture to read more)

Wes McDonough, Managing Director, CGK Business Sales

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Wes McDonough has over 18 years of experience in both entrepreneurship and corporate finance. Previous to CGK, Wes held numerous positions, including accounting, payroll, billing, project management, and IT/Application Support at ... (click Wes' picture to read more)

Matthew Zienty, Managing Director, CGK Business Sales

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Matthew Zienty has 20+ years of financial industry experience in areas ranging from institutional equity trading, currency trading, financial sales, RIA valuations, payout/loan negotiations & compliance. He has worked for ... (click Matthew's picture to read more)

David Smoot, Managing Director, CGK Business Sales

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David Smoot has 20 successful years working for Fortune 500 companies in sales and finance and owning his own small businesses. His leadership roles included sales, finance, managing multi-million dollar product launches, training new ... (click David's picture to read more)

Thomas

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Mr. Thomas “Jay” Lennon is an Air Force veteran, combat aviator, and distinguished leader with 26 years’ experience leading multi-million dollar projects, finance, and organizational transitions, inside and outside of the government.... (click Jay's picture to read more)

Lance Hupfeld, Managing Director, CGK Business Sales

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Lance Hupfeld has over 25 years of experience in sales and business development management. With a broad array of valuable experience, Lance has deep knowledge in healthcare consulting... (click Lance's picture to read more)

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The experts at CGK Business Sales are ready to talk to you about business valuation. And it’s always 100% confidential. 
While we certainly love when you call, as you can imagine, we spend the majority of our day on the phone, closing deals, so we love it even more when you use this form to email us!  We will get back to you as quickly as possible!  Seriously!  This form only goes to Greg’s email (CGK’s owner), so it’s completely confidential!


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