How Much is a Business Worth to Sell | Determine Business Worth
Many factors go into determining how much is a business worth selling. These 5 methods of valuation can assist in finding out how much you can sell your California-based business for.
Business Valuation Examples to Determine Business Worth
While not an extensive list, these eight business valuation examples or methods can assist in determining how much the business is worth.
A certified business broker specializing in valuing and selling California-based businesses can assist with choosing the best valuation that suits your business’ circumstances.
- Market value: Calculate the current value of the business’ shares and multiplies it by the number of shares that are currently outstanding.
- Asset-based: For businesses that will continue operating during the sale, use the current assets to calculate the value. Companies that cease operations use a liquidation method that includes revenue from selling assets like equipment.
- Capitalization of earnings: This calculation uses the cash flow, return on investment (ROI), and assumed value.
- Book value: Using your balance sheet, it’s the value of your total shareholder’s net equity, that is, total assets minus liabilities.
- Replacement value: It’s simply the cost it would take to replace everything in the business at present-day values.
- Multiples of earnings: The times’ revenue method multiplies the average of previous years’ revenue with a multiplier unique to their business.
- Liquidation: Calculated by determining the total value of all assets if you liquidated the business.
- ROI-based: The calculation is the amount paid divided by the percentage as a decimal.
If an investor buys into XYZ, Inc with $100,000 for 25% (0.25), the valuation is: 100,000/0.25 = $400,000.
Determine Fair Market Value
The fair market value is what the California-based business would sell for on the free market. It uses the SDE and the industry multiplier.
- Net profit ($100,000)
- The salary of the owner ($25,000)
- Any add-back expenses for the owner ($1,000)
- Multiply the sum by the industry multiplier, usually a number between 0 and 4.
A business broker can help you figure out the multiplier.
The resulting number is your fair market value. ($100,000 + $25,000 + $1,000) x 2 = $252,000
Multiples of Revenue
The times’ revenue calculation uses actual revenue from the past fiscal years and then times it by a set multiplier to calculate the total worth.
The time revenue method determines a business’ worth by calculating a range of values, including an absolute minimum, known as the floor, and a maximum value known as the ceiling for a business. A business in California can then find a middle-ground for selling with these two values.
The times revenue method is dependent on using the correct multiplier for your business. However, the multiplier is dependent on a variety of factors which can include:
- The location
- The size of the business
- The industry and current market trends
- Business’ tangible assets like real estate
A business appraiser or consultant can assist with determining the multiplier for your evaluation to ensure you end up with a fair and accurate fair market value.
The average times’ revenue calculation may include a multiplier that is a factor of one to two or even as high as three to four if the business is poised to grow quickly in the upcoming season.
Service industries or companies with a low forecasted future may use less than one. However, for revenue multiple valuations on a distribution business are more effective.
Valuation Reports to Find Business Worth
When determining your business’ worth, there are three levels of a report that an advisor can draw up, ranging from a minimum amount of information to a complete, detailed account of the business.
Choosing the correct report for your situation is essential to avoid excluding information without overpaying for detail that isn’t required.
The least-detailed valuation report includes a valuation of the business’s shares, interest, and assets. It contains calculations to show this value but doesn’t corroborate the information and relies on the truthful presentation of the necessary information.
This report is best for small to medium-sized businesses for tax purposes or passing a business from parent to child. Companies involved as part of a family dispute may only require a calculation report if the parties involved are already familiar with the business.
It may not have enough information to satisfy a buyer if you’re selling the business in California to an outside party.
A report that offers more information than a calculation report but less than a comprehensive, it details everything that a calculation report offers, plus analysis and corroborates the numbers.
Medium to large-sized businesses may use this report for:
- Tax purposes
- Sale of the business, especially a sale between shareholders
A small or very new business in California may find this report useful, but a business with a legacy may wish to obtain more information to ensure as high of a market valuation as possible.
This is the most detailed valuation report that includes everything from an estimate report to a further detailed analysis of the market trends, industry, and factors that may further influence the value.
The report aims to provide a well-rounded snapshot of the business, both past, and future, to reinforce the seller’s claims.
It’s a good choice for selling a company outside the family since it paints the whole picture for potential buyers.
The added costs may not be worth it for very small and new businesses in California that don’t have as much information for the business broker to assess.
Get Help From an Expert to Determine Business Worth
Hiring a qualified business broker can be the difference between a reasonable valuation and a not-so-great one.
Valuing a business is not easy, especially for the busy business owner retiring in California. Business valuation professionals have made it their career to provide the reports and advice necessary to assign the correct number to your business.
Ensure you have the best information by hiring an expert to be on your side, and allow them to use their knowledge to consider the factors to increase the value of your business.
Final Take on Finding How Much is a Business Wroth to Sell
A business in California will likely sell for two to four times its SDE, Seller’s Discretionary, Earning.
Valuing and selling a business in California can be complicated. Determining how much does your company is worth, its assets, and operations is also an important factor to consider in the whole valuation process.
To ensure you are getting the most out of your company, you must partner with a professional business broker who is specialized in your industry to guide you through the process. Your business has come a long way, so make sure you maximize the value of your business before selling it successfully in California.
It is currently the perfect storm to value and sell your business in California. With the great resignation that started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.