Are you asking, “What is my business worth?” Selling your business can be an intimidating process. There are numerous factors to consider, making the process confusing 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, it is essential to cover some key factors that can help you determine the value of 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 Seller Discretionary Earnings (SDE) calculations for a first estimate of the market value. In general, a business will sell 2- 4 times the price of the SDE, with most selling for 2- 3 times 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 for sale in California, you will want to explore various 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. Additionally, you typically consider five years. This approach determines the present value of your company, which is particularly beneficial for newer businesses that are not yet profitable.
- Market Approach: In this market approach valuation, you determine a value based on the sale prices of similar products or services offered by your competitors. You can use either competitor profits or sales when calculating business valuation.
MA=Competitor Selling Price Competitor 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 a business that is highly similar to yours.
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 accurately than some of the techniques mentioned above, as it is derived from current trading prices.
However, differences in companies mean that one cannot compare their absolute values. Valuation multiples help standardize the worth of these companies, enabling practical comparisons.
Valuation Multiple=Value MeasureValue Driver=Enterprise/Equity ValueBusiness Metric
How much can I sell my business for? These companies’ (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 unlevered (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 a 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 conduct interviews and inform customers about your company.
Lastly, a broker will manage your financial due diligence to facilitate a smooth sale closing. They’ll work with the buyer and seller to reach an acceptable agreement, review documents, and complete the final steps in transferring ownership.
Final Word: What Is My Business Worth?
When valuing and selling your business and determining its worth, you will encounter various firm valuation techniques. Depending on your industry, time in business, and the present market, you might benefit from one method more than another.
Ensure that you 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 specializes in your industry to guide you through the process. Your business has come a long way, so ensure you maximize its value before selling it successfully in California.
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.
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