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Beacon Equity Advisors

What is a Business Worth?

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.

Risk probably comes in 1,000 flavors. Here are some of the more common risk factors: competition, technological obsolescence, the possible loss of major customers and/or key employees. These risks are enterprise specific. Other risks relate to the economy at large such as interest rates and conditions in a specific sector such as construction.

But each business has its own risk factors that affect value. For retail stores on a busy road the potential for a changing traffic pattern is a risk. For a service business changing government regulations could be a potential risk factor. The list of potential factors that affect value is endless. That is why it is impossible to give a simple rule for valuing a business. Each business requires its own analysis.

The bottom line is that most of the businesses I see sell for between two and seven times cash flow. Businesses with lower cash flow risk have higher multiples. Please feel free to call if you would like to discuss further.

Regards,

Jon SIgnature

Jon Fudeman

Beacon Equity Advisors

Coming up in future newsletters:

How to prepare a business for sale.
What buyers are looking for?
Using a contingent sales price.
What is cash flow?

	Since 1985 Beacon has worked on behalf of hundreds of business owners. Our representation has enabled these owners to realize the true value of their company in this once in a lifetime transaction. We bring together owners and buyers in a way that defines and enhances value, facilitates smooth transitions and enables company traditions to be carried on.