How to determine a business’ worth

As you think about selling, one of the questions that probably comes to mind is:

“How much can I get for my company … what’s it worth?”

In reality, you must be ready to sell for a price that the market is prepared to pay … because the market sets the price.

Book value, which is the amount of assets on a balance sheet, is not a true reflection of a company’s worth.

Selling value IS based on recent results, growth opportunities,

and overall company quality.

Some other value drivers are:

• historical profits

• good books and records that are defendable

• reputation

• location

• employee tenure.

Here’s why good books and records are important…

Most businesses are sold based on what’s called a multiple of earnings.

Earnings are really profits.

In smaller companies, earnings are sometimes called Discretionary Cash Flow… or the letters D-C-F.

D-C-F is the TOTAL of economic benefits to owners before taxes.

Discretionary earnings are calculated by taking the Net Profit on a financial statement, then adding back the dollar value of certain items.

Some of them include adjusted Officers’ Salaries, Interest, Depreciation and Amortization.

Others are nonrecurring expenses, plus ownership perks.

These are items that are NOT absolutely essential for the operation of the business.

They’re expenses that a new owner may or may not be faced with.

So, when trying to determine what you can get for your company, keep in mind that it’s probably worth some multiple of earnings or a multiple of owner’s Discretionary Cash Flow.

Eric R. Voth is a serial entrepreneur, a private investor, consultant, and writer. He is author of How to Sell Your Privately Owned Company, a Basic Guide for Independent Business Owners, Baby Boomer’s Edition. Eric and his colleagues help a business Seller prepare and groom his or her company prior to offering it for sale or merger – then guide the owner through the actual process. He became involved in this field as a result of merging his own company in 1993.

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