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Multiple of
Seller’s Adjusted Net Cash Flow:
The most
widely used method to value and determine an asking price
for a small business is based on the adjustment or recasting
of a business's most recent annual profit and loss
statement. The goal in this process is to determine the true
earning power of the business by adding back to the net
profit all the non-essential or discretionary expenses not
necessary to run the business to demonstrate a more
realistic net cash flow for the owner.
Once this
number is determined, the next step is to multiply it by a
business category related multiple (service, retail,
manufacturing, etc) that are widely used as rules of thumb
by the business valuation and business brokerage community.
For instance, in general terms small service related
businesses are generally valued at a multiple of somewhere 2
to 2.5 times the Sellers annual adjusted net cash flow.
Small manufacturing businesses generally receive higher
multiples that can be in the 3 to 4 times range.
There are a
variety of resources available to the public to find and
research cash flow multiples that may be relevant or
specific to your business. This includes well known guides
such as the Business Reference Guide by Tom West, and
business for sale directories such as BizBuySell.com that
provide a data base of recent business sales and the
multiples achieved. You may also want to visit
fastbusinessvaluations.com which provides a free online
business valuation calculator based on widely used industry
related valuation multiples.
I would
also recommend if you are considering selling your business
to contact a local professional business broker in your
area. He or she may be able to provide you with valuable
information about recent sales in your market of similar
businesses like yours, and the net cash flow multiple that
they eventually sold at.
Industry
Rules Of Thumb:
Another commonly used quick business valuation
method is to use a general rule of thumb. A rule of thumb
valuation basically consists of using a simple formula that
estimates the value of a business through a set of
established and very general business pricing guidelines.
For example:
Auto Repair Shop: 35% of annual revenues
Full Service Gas Station: 2 to 3 times Sellers Adjusted net
Fast Food Business:
40% of annual revenues
Janitorial Service:
2 times Sellers Adjusted net
Motels:
$20,000 per room
Keep in mind like all quick valuation methods
“rules of thumb” are subject to the various unique
characteristics of each target business being valued.
Reference books like the aforementioned “Business Reference
Guide” offer a comprehensive and excellent database of
“rules of thumb’ by individual business category.
Market
Comparables:
With the
advent of the Internet, business owners now have the ability
in most cases to view dozens (sometimes more) of real time
listings of businesses very similar to their own on large
online “business for sale” directories. Although it’s been
my observation that many of these small businesses listed
for sale tend to be overpriced, these directories such as
bizbuysell.com still can provide a very useful source of
free raw data, including rough comparables of both “for
sale” and “sold” business listings. Keep in mind also that
very few businesses will ultimately sell at there listed
asking price, but if priced properly, (and the price can be
supported with good financial records) many should
ultimately sell with in 80% of their asking price.
Liquidation
Value:
This is a
relatively simple and fast way to value a small business by
determining what the sale or liquidation of all the
businesses’ hard assets (equipment, inventory, receivables)
would generate in total proceeds on the open market after
paying off any liabilities or debt associated with the
business. Although a business liquidation valuation is a
relatively straight for ward process, it does have
significant draw backs as a valuation method because it does
not take in to account the value of important factors such
as goodwill, established customer/client base, future growth
potential, and more.
Summary:
Keep in
mind that even though all these valuation methods above
offer either a quick and inexpensive way to get a rough idea
of the value of most small businesses, or can be used as
pricing guidelines when selling a business, at the end of
the day a business is worth what some else is willing to pay
for it. |
