There is no simple method, but to approximate the value of your business, you should consider both its assets and earning power.
Generally, the earning power of a business is defined as the annual pretax earnings plus owner's salary and perks added back, which determines the real earning power or the Seller's Discretionary Earnings (SDE).
Our business advisors typically use or offer several types of methodologies to value a business. Also, market-based data (comps) can be used in conjunction with an SDE methodology so that they can serve as a "reality check."
Most buyers and lenders place extensive weight on the company's ability to generate earnings. Therefore, it makes sense to use earnings methodologies to determine the value of a business and then use market-based data to check the reality of the value.
As with most things in life, demand and asset value will also influence the business value. Desirable businesses and businesses with a large asset value command a premium. In the final analysis, however, the price tag on the business is your decision.
There are many techniques and methods for valuation of a business and to simplify issues Sunbelt typically offers four types of business appraisals:
Opinion of Value: A business valuation used for businesses with annual sales under $300,000.
Value Analysis: Limited scope, small business valuations for "Main Street" businesses with sales between $300,000 and $1,000,000. The report is about 40 pages long and considers primarily historical and current performance.
Formal Valuation: Also a limited scope valuation, this business asset appraisal is suitable for firms with sales between $1,000,000 and $3,000,000. About 70 pages long, the report emphasizes ratios, trends, and common size analysis. In addition to company earnings, the balance sheet will be a key component of this analysis.
Mergers and Acquisitions (M & A) Value: A customized valuation, the fee depends on the type of business and the use of the business appraisal.
Your Sunbelt advisor can help you determine which business appraisal best suits your needs and can also help you gather and package the necessary information required for the appraisal.
Guidelines & suggestions for information and documents required for an accurate valuation.
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3 years (Minimum) financial statements - Operation statements and balance sheets. -
Interim Financial Statements and pro-forma projections for remainder of fiscal year
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Pro-forma projections for next 3- 5 years *optional
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Unrecorded revenues or expenses such as cash / barter / warranties / services paid but not performed, products and inventory delivered or received but not paid.
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List of FF&E Furniture fixtures and equipment. It will help to have a estimated market value.
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A snap shop of typical inventory on average and at sellers cost. Estimates on obsolete inventory and non turning inventory as well as details of any seasonal min / max.
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List of real estate assets with municipal valuation and taxes.
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Copy of lease and details such as taxes, hydro, gas, restrictions on the business / competition as well as any sub lease etc.
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List of vehicle or equipment leases and an estimate of their value at the end of the lease.
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Copies of any franchise agreements, suppliers agreements, major customer agreements, key employee agreements.
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Relevant notes on competition and market size and market share.
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Relevant notes on strategic areas of core value and competitive advantage. ie location, ease of business access, technology, unique products, reputation etc.
Everyone who owns a business needs to know its value in today's marketplace. Having a business appraisal can be very important if you are considering:
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Selling your business. -
Bequeathing your business to a family member.
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Looking for ways to increase the value of your business.
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Buying out or accepting a new partner / owner.
Saturday, September 29, 2007
How do you value my business?
