How Much Is My Business Worth – How much is my business worth? It’s a question every entrepreneur, founder and business owner asks themselves. This is especially true during acquisition discussions with a potential buyer. Because many companies are privately held, the acquisition details of the nearly 10,000 businesses that sell for less than $500M each year in the US remain hidden. There is great potential in the M&A market which indicates that M&A activity will increase significantly in the next few years. Therefore, every business leader must develop and maintain a good understanding of the market value of their business.
As the data in the chart above shows, the amount of capital held by large public companies has doubled from $675B to $1.2T in 5 years, a growing war chest that will fuel increased M&A activity in the coming years. In addition to the glut of public company capital for acquisitions, private equity firms have amassed a 10-year high of $412B in dry powder, additional M&A capital.
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Two years ago, we invested in Axial, a company that used these methods and has become the largest marketplace in the US for M&A transactions, with more than 200 businesses joining the platform each week. Today, Axial released a valuation tool to help CEOs across the US estimate their business value. The Axial Valuation Tool uses discounted cash flow analysis and gathers several pieces of information about a company to provide a Zillow-like Zestimate of a company’s value. Because the DCF model uses profitability as the primary variable, the estimator will not work for many startups that are primarily concerned with growth. But for millions of for-profit US businesses, the Axial Measurement Tool works best.
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In addition to helping business owners understand the value of their business, Axial connects business owners with beneficiaries, lenders and investors, providing entrepreneurs with clarity in a traditionally opaque market. Finally, the company provides advice and guidance on how to initiate and manage M&A processes.
The Internet has a unique ability to create highly efficient marketplaces and networks. We’ve seen it in categories and collections, real estate and resumes. Axial’s ambition is to do the same for the $200B annual M&A market, by helping founders and CEOs increase the value of their companies. Many small business owners want to know what their business is worth. The answer, as in any transaction, is what the buyer is willing to pay. And what a given buyer will pay may depend on many factors about the particular industry and business situation. For more detailed information, it pays to use a business valuation expert like Dan Gilbert at Gilbert Valuations, LLC.
Business salespeople often use short formulas based on multiples to figure out the potential price. This makes sense because profits are more important than total sales. And buyers often view business purchases as investments. Using a multiple return formula allows the buyer to get a sense of how long it will take to recoup that investment and start making a profit.
Simple enough so far, but how do you know what it means for a particular business? First, what benefits are we talking about? Last year? The resulting ratio of past profits? Current benefits? Or projected earnings that predict the future? Assuming we can agree on the right measurement time, the next question is how do we calculate those benefits? Most accountants generally use a formula that measures earnings before interest, taxes, depreciation, and amortization (“EBITDA”). It sounds complicated, but the goal is simple – to find out how much money the business is generating through operations.
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After deciding what the income is and how it is calculated, the third question is what multiplier should be used? For most businesses, it is between 3 to 5 times EBITDA. For the buyer, this can mean recouping your investment in 3 to 5 years from business profits.
The bottom line is that the rules of thumb are simply a shorthand way of “guessing” the potential sales amount. There are many factors that come into play, and there is no substitute for using a qualified professional to check the details. As they say, the actual mileage may vary. But when thinking about your exit strategy, it’s important to have an idea of what that might be before you take your company to market.
In this short guide, I’ll look at which valuation models you can use to find out what your business is worth…
And why should you take these with a grain of salt if you want to find the right fit for your business if you’re going to sell.
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Want to know what a buyer would be willing to pay for your business if you put it up for sale today?
Use industry-wide EBITDA multiples to get an idea of what your business is worth.
Simply multiply your company’s annual revenue for the last tax year by the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITA) multiplier for your industry.
It is not easy to find a formula that gives you an accurate idea of the value of your business.
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That’s because most valuation models look at the past, not the potential value you’ve worked to build in your business.
The question “how much is my business?” Therefore, the best answer is if you clarify it with the question: “to whom?”
Most business owners fail to get an accurate idea of their business’s worth because they don’t put themselves in the shoes of potential buyers.
Think about how you take a product to market – you start with the problem you’re trying to solve and target the right client.
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Most business owners forget all this when it comes to selling their most important product – their business.
So, after years of hard work and sleepless nights chasing growth and high profits, they wonder why their business only costs an average annual income of 3.66:
While a business valuation is useful for getting a rough idea of what an investor might think your business is worth before they look under the hood, it’s definitely not the price you should accept if your business is running without you and has a steady stream. in the area of regular income.
Therefore, instead of setting the asking price of your business on a scale, I strongly recommend that you think about increasing the value of your company, regardless of size or industry.
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When it comes to selling your business and raising the price, you need to start thinking like a potential buyer:
When you look at your business the way a potential buyer would, you notice things you might otherwise overlook, including improvements you can make and best practices you can implement.
Stephanie Breedlove started the payments company in 1992, and by 2012 they had reached $9 million in annual sales. He sold for 54 million dollars – almost six times his revenue. Listen to his story.
Rod Drury founded Xero, a cloud-based accounting platform. Drury made a big deal by selling another company, AfterMail, for $35 million ($15 million plus $20 million in potential proceeds). Not bad for a company with just over $2M in revenue. Listen to his story.
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These are just a few examples of entrepreneurs who have greatly increased the value of their businesses by thinking like a consumer.
When a professional advisor values your business, they usually give you a price tag that is a small multiple of your current net profit, based on your historical revenue.
But as Stephanie and Rod’s stories – among many others, including my entrepreneurial journey – show, this is far from the end of the story.
Most importantly, conventional methods ignore buyer power (the amount a buyer will get out of their investment) when arriving at a valuation.
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If your business provides strategic – and purely financial – benefits to the consumer then it may attract a much larger audience to them than traditional business valuations would suggest.
Let’s get into valuation principles so that you understand exactly what will be going through the mind of an investor when he evaluates your business.
That said, I’m an entrepreneur who has sold my fair share of businesses, and I’ve picked up a few things along the way.
In strict financial terms, the value of a business comes down to the present value of the company’s revenue.
What Is Ebitda And How I Do Use It To Value My Business? — Rory Vaden Official Site
Present value accounting factors in the discount a buyer will pay today for a future income plan.
Valuation basically determines what an investor can pay in line with the net profit of the business.
My business is worth X (investment) because it returns a series of future cash payments (income).
But if you think about it, accurate valuation needs to consider what the buyer is likely to do with your business.
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For example, if your ideal buyer can significantly improve the growth rate, market penetration or profitability of your business, you should be aware of the high valuation, as they will be doing much more.
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