Greetings!

Now that I help owners sell their business (I think the hot new term is Exit Planning) I find people are asking me frequently: What is my business worth?  That is, how much can I sell it for?  Frankly, I am finding a lot of misconceptions. Some business owners believe their business is worth a lot more than it really is. Well, here's the lowdown. First, I am talking about businesses with a profitable track record and between $2 and $50 million in annual revenues. These are the businesses I deal with and can speak about.  

Buyers of these businesses are most of all looking at future cash flow to pay back the purchase price over a given number of years, the quicker the better. This estimated payback period drives value. From the payback period you can calculate value components - you may have heard of such terms as earnings multiple or capitalization rate. The payback period typically ranges from a low of two years in a very risky business without stable cash flow and staying power and up to six or even seven years in special cases.  If you were looking for an 8 - 12 multiple those days are passed unless you are Facebook.  A profitable company with good growth prospects will permit a longer payback period. These payback periods correspond to cash flow multiples of between 2 and 7. The greater the risk associated with the cash flow, the quicker the necessary payback and the lower the business value.  A track record of stable or growing cash flow usually means less risk and more value.  However, the potential buyer is always trying to gauge future risk as best he can.

Buyers of these businesses are most of all looking at future cash flow to pay back the purchase price over a given number of years, the quicker the better. This estimated payback period drives value. From the payback period you can calculate value components - you may have heard of such terms as earnings multiple or capitalization rate. The payback period typically ranges from a low of two years in a very risky business without stable cash flow and staying power and up to six or even seven years in special cases.  If you were looking for an 8 - 12 multiple those days are passed unless you are Facebook.  A profitable company with good growth prospects will permit a longer payback period. These payback periods correspond to cash flow multiples of between 2 and 7. The greater the risk associated with the cash flow, the quicker the necessary payback and the lower the business value.  A track record of stable or growing cash flow usually means less risk and more value.  However, the potential buyer is always trying to gauge future risk as best he can.