In This Episode
At some point during your business life cycle, either you or someone else will ask you this question, “What’s my business worth?” The quick answer is it depends! It depends on a lot of factors. Some of these factors are things you can control while others are out of your control. For instance, you have some control over how you set your selling prices and control your costs, but you can’t control the overall industry growth or how your competitors act.
Without getting too technical, there are typically 3 ways to value a business:
• Asset Approach: usually the lowest value and is based on the net assets shown on your balance sheet.
• Market Approach: this approach compares the company being valued to comparable publicly traded companies or to comparable businesses that have recently been acquired.
• Income Approach: this approach focuses on the ability of the business to generate cash flow.
To value your business you will want to focus on either the Market or Income approach. For the Market Approach, there are different databases you can access (e.g. DealStats) which provide details on those private transactions. Like any privately reported data, these items need to be taken with a grain of salt, but can certainly be helpful in seeing how the marketplace values your competitors.
The Income Approach will be focused on cash flow which goes by a lot of names. The most popular names are EBITDA (Earnings Before Interest Taxes Depreciation Amortization) or ODCF (“Owner’s Discretionary Cash Flow”). The simplest way to think about ODCF is how much benefit do you receive from owning the company.
To calculate ODCF, you start with your net income or profit for the year and then add back any non-cash items (e.g. depreciation) as well as any items which aren’t required for the business to run. Think of things like your cell phone bill, fuel for your vehicle, and meals & travel. These are things that are being expensed in the business at your discretion and chances are the next owner might not have a lot of the same expenses.
Once you’ve added all these items to your net income you will have your ODCF for this year. Chances are you’ll want to look at it for the past couple of years. That ODCF number is then multiplied by a “factor” to get to the valuation of your business. For instance, let’s say your ODCF is $100,000 and people typically pay 3x ODCF for a business like yours, then your business is worth $300,000.
Not enough? Don’t worry because selling your company is a negotiation like anything else so you can make the case for why you should be paid more. Also, you may not be ready to sell at this point. We find that many owners have a “number” in mind that they’d like to get for their company. After going through some of the analysis laid out above, you’ll be able to see how close or how far away you are from that desired number!
During the show we give you some ideas for how to start getting answers to this valuation question on your business including things like consolidators. Enjoy!
People, Companies and Resources We Mentioned in the Show
DealStats/Pratt’s Stats (https://www.bvresources.com/products/dealstats)