How to Value a Service Firm in California
How to value a service firm? In this post, we will be exploring the best method on how to value a service company in California.
Knowing the exact value of your firm is crucial and there are several business valuation methods when it comes to determining the value of a company.
Value a Service Firm Quickly
Business valuation methods usually use the worth of your company’s liquid assets, equipment, property, or anything else of economic value that your company owns.
So which is the best business valuation approach to calculate the value of your service firm?
According to business valuation experts in California, EBITDA multiples (otherwise known as earnings before interest, taxes, depreciation, and amortization) are one of the best valuation multiples for service firms.
EBITDA company valuation method brings out a firm’s operating performance. This plays an important role in determining the value of a service enterprise.
According to many business owners, EBITDA is very straightforward when it comes to calculating and determining a service firm’s value. Another reason why this service business valuation method is preferable is that it is widely used by business sellers and buyers across the globe.
Read more: How to Value a Professional Firm Based on Income Calculation
EBITDA Valuation Multiples for a Service Firm
This business valuation calculation method excludes expenses such as tax, debts, among others, to portray a raw indication of a service firm’s earnings, therefore, demonstrating its value.
There are two formulas you can use here:
- EBITDA= operating profit+ depreciation+ amortization
- EBITDA= net income+ interest + taxes + depreciation + amortization
Here is a more in-depth explanation of EBITDA’s components.
Interest is eliminated when calculating a service firm’s value because it depends on its financial or capital structure. Since the capital structure varies from one business to another, the financial structure is always excluded to easily compare the value of different companies.
Interest, in this case, includes a company’s financial expenses, such as the interest rate on loans acquired from third-party lenders or banks.
This component consists of any state, federal income, and local taxes imposed on a business by the government and other tax regulatory authorities.
Deductions comprise any non-cash expenses that show a reduction in a firm’s value.
This component consists of expenses such as the cost of intangible assets.
How to Increase Value in a Service Firm
Any California main street business owner would want to increase the value of their service company. Luckily, there are many ways to build up your firm’s value. However, it is important first to identify what affects the value of your service enterprise.
This is one of the major factors that affect the value of your service firm. So, how exactly do finances affect the worth of your company? For starters, how you control costs or expenses in your service enterprise significantly determines its worth.
Your business’s past, current, and projected cash flow and profits also play a significant role in determining its value.
Your Service Firm’s Assets and Liabilities
This includes the value of your company’s properties and debtors.
Some factors may be out of your control that could also significantly affect the value of your service firm. These include the level of demand for your products or services, the level of competition, how similar businesses are valued, among others.
Boost Your Profits in Your Service Firm
Your company’s profits greatly affect its value because it will determine whether or not you will have people interested in investing in the business. Increasing your firm’s profits mainly involves decreasing costs and increasing the sales revenue.
One way to boost your firm’s profits is doing away with unprofitable services or products. You can also aim at reducing the costs of supplies and strategically increase the prices of your products or services.
Increase Sales and Reduce Expenses
One of the best ways to increase your sales is by improving your marketing strategy. You could also lower your company’s expenses by reducing production costs, lowering supply expenses, to mention a few.
Get Advice From an Expert
This is important, especially if you are preparing to sell your service company. Hiring a professional business intermediary or broker in California to help you correctly calculate the worth of your service firm, can help you save a lot of time and can eliminate guesswork.
Hire Business Broker to Help You Prepare Your Firm for Sale
There is a lot that goes into preparing to sell your service company. From negotiating with potential buyers to determining the exact value of your company. While you may know everything concerning your business, having a broker by your side will help you navigate smoothly through the selling process.
Here are ways in which an intermediary or a business broker can help you determine the value of your service firm and sell it for the right price.
Understand Your Industry
Of course, you understand your industry in the business services sector, but a business broker will help you know what makes your company unique. A business intermediary will also help you get acquainted with your industry’s current trends to help you better prepare your firm for sale.
Conduct a Businesses Valuation
Determining the exact value of your service enterprise can help you know what to do to increase its value and determine the right asking price. A broker can help you calculate the true value of your business by conducting thorough research on your service company’s performance and finances.
Get the Right Price for Your Service Firm
No one will know how much your business is worth more than a California-certified business intermediary. This is because they will take their time to evaluate your business’s performance, profits, and overall worth. An intermediary is, therefore, the right person to help you negotiate the perfect asking price for your company.
Service Company Valuation: Let the Experts Handle It
While there are many methods to determine the value of your service company, the EBITDA business valuation approach is recommendable. It focuses on a company’s operating performance, which gives a true picture of a firm’s value.
Determining the value of your company will go a long way in helping you know what to ask for when selling your service enterprise. While it can be an overwhelming process, having a certified business broker by your side can make things easier and help you get your service firm’s worth.
Go to the next article: Part of tips to sell a company in the professional services business in California series ->