What is My Business Worth? | Valuing and Selling Your Business
Are you asking this question: “what is my business worth?” Selling your business can be an intimidating process. There are a lot of factors to take into account, making it a confusing process for many.
So, to make things easier, we’ve put together this guide on how to value your business in California.
How Much Can I Sell My Business For?
Before exploring firm valuation methods, we need to cover some of the factors that can help you determine how to value your company for sale in California. Some valuation factors include:
To answer a popular question that a lot of retiring business owners ask in California: “how much can I sell my business for?”, some valuation factors include:
- List of tangible and intangible assets
- An income statement
- A cash flow statement
- Your balance sheet
- Your discretionary earnings
A business brokerage firm can help you figure it all out. However, you can easily perform many of the calculations for a business valuation yourself.
SDE Calculations
When learning how to value a business to sell in California, you need to start with SDE calculations for a first estimate of the market value. In general, a business will sell 2-4x the price of the SDE, with most selling for 2-3x the value.
You will calculate your SDE using the previous year’s financial records. Here are a few steps to find your SDE:
SDE=(net earnings before taxes)+(personal draw)+(nonessential expenses)-liabilities
Types of Business Valuations
When learning how to value your business to sell in California, you will want to explore different valuation techniques. Multiple business valuation methods depend on your industry and the market. Ideally, you could get 3-5 years of SDE for your business.
Nonetheless, the amount you receive often varies from this value. Here are corporate valuation methods to explore:
- Asset-Based: Asset-based valuation depends on your book value (BV). You can get this by subtracting any lost value from the book value.
BV=(Total Assets-Total Liabilities)-Lost Value
Valuing your business this way is easiest, but it results in the lowest value since it does not include intangible assets.
- Discounted Cash Flow: The discounted cash flow (DCF) technique uses your current cash flow and discounts some of it based on the chance of future losses (risk).
DCF=CF1(1+r)1+CF2(1+r)2+…+CFn(1+r)n where CF = the cash payments investors get, r = discounted rate, and n = the time period.
Usually, you calculate r using the weighted average cost of capital. Also, you generally consider five years. This approach determines the present value of your company, which is best for newer businesses that are not profitable yet.
- Market Approach: Here you determine a value using the sale price of your competitors. You can use either competitor profits or sales when calculating business valuation.
MA=Competitor Selling PriceCompetitor Profits or Sales*Your Profit or Sales
This technique has several flaws. Your competitor may have significantly different profits and cash flows or the sale agreement could include non-cash value assets. As such, you should only use this fair market value method if your competitor has an extremely similar business.
Valuation Multiples: What is My Business Worth
Valuation multiples are ratios that help to calculate business valuation. They also assist in comparing the value of firms with different characteristics.
You can determine the approximate value of a company by comparing it to the value of similar businesses. This valuation reflects reality more than some of the aforementioned techniques since it is derived from current trading prices.
However, differences in companies mean that one cannot compare their absolute values. Valuation multiples help to standardize the worth of these companies to make practical comparisons.
Valuation Multiple=Value MeasureValue Driver=Enterprise/Equity ValueBusiness Metric
How much can I sell my business for? These company’s (financial and operating) metrics can help in determining your business value:
- Earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Revenue
- Earnings before interest and taxes (EBIT)
- Free cash flow to the firm (FCFF)
- Net income
- Earnings per share (EPS)
- Free cash flow to equity (FCFE)
You can use revenue, EBITDA, EBIT, and FCFF when utilizing the enterprise value as the numerator as they are un-levered (pre-debt). The others only work when you use equity value since they are levered (post-debt).
Some valuation multiples are:
- Price-to-earnings ratio (PE=Enterprise ValueEBITDA)
- Price-to-earnings-to-growth ratio (PEG=Enterprise ValueEBIT)
- Price-to-book ratio (PB=Enterprise ValueRevenue)
Hiring a Certified Business Broker in California
You don’t want to cease business operations just because you need to value and sell your company in California. Hiring a mergers and acquisitions brokerage firm can help.
Business Brokers will help you to maximize business value before selling your company. They can take you through the necessary steps to sell your firm in California
Initially, a broker will collect any documents needed for performing a business valuation. They can value it using multiple techniques to determine the ideal market price. The advisor will also gather any legal forms for selling business in California.
Next, the business broker or a brokerage firm will find and interview potential buyers for your business. They work with you to determine the desired customer and help identify suitable individuals. Then, they work with you to interview and inform the customers concerning your company.
Lastly, a broker will manage your financial due diligence to close the sale. They’ll work with the buyer and seller to come to an acceptable agreement, review documents, and process the final steps in transferring ownership.
Conclusion: What Is My Business Worth?
When valuing and selling your business and determining how much is it worth, you will come across many firm valuation techniques. Depending on your industry, time in business, and the present market, you might benefit from one method more than another.
Make sure to consider your assets and finances when selling your business. Start by calculating the SDE and working your way through other applicable business valuations.
One technique that we highly recommend is the valuation multiples method. There are many variations of this option, and you can readily compare your company to others once you find a few multiples.
If you find that you are still struggling with selling and valuing your business to determine how much it’s worth, consider working with a business brokerage firm. They can also find potential buyers and help you close the sale of your business.
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.
With a certified business intermediary at your side, we feel confident that you will determine the business’s worth and sell your business in California successfully at the highest price.
Go to the next article: Part of business valuation to answer what’s my business worth series ->
