How Much Is My Business Worth? | Edison Avenue

TRANSCRIPT

How Much Is My Business Worth?

Slide 1:  Hello, on behalf of Edison Avenue, welcome to "How much is my business worth?"  This is one in a series of videos from Edison Avenue that cover the basic steps you will encounter in selling your business.  The first step in this process is finding out how much your business is worth, and what changes need to be made to get the optimum price when it comes time to sell.  I'd like to thank you for your interest in working with Edison Avenue to help you sell your business. 

Slide 2:   The Edison Avenue Team is one of the most innovative and experienced business brokerage mid-market Merger & Acquisition firms in Florida.  We have over 50 years of combined experience in business sales and consulting resulting in transactions worth over 150 million dollars lifetime. We represent a diverse number of qualified buyers including displaced corporate executives, private equity groups and high net worth individuals.  Our team is highly trained to assist you in valuing your business, preparing your business for sale, guiding you through due diligence and effectively and efficiently transferring your business.  Our objective is for you to receive full value and peace of mind after the sale. 

Slide 3:  Now, back to exploring the Value of your business.  There are many factors that control the value, but the only value that matters is what someone is willing to pay you for your business. 

The primary reason a buyer wants to purchase your business is the amount Owner Benefit they can expect.  Owner Benefit can be realized in many areas.

• Cash Flow, or the amount of expendable cash they will have available for a salary, debt service, and profit.
• Tax Benefits such as depreciation, amortization, and the ability to write-off dinners, trips, automobiles, and other expenses.
•  And any of the owner’s personal benefits such as health insurance, life insurance or retirement accounts.

The more owner benefit your company can demonstrate to a prospective buyer, the more the buyer will be willing to pay for it.

Slide 4:  There are many wife’s tales told about what your business is worth.  Some examples are:

• Three times profit
• Two times owner benefit plus inventory
• Or 100% of annual sales volumn

Some industries do have general guidelines, but the truth is that every business and market is unique, and like people, and need to be treated as such.

Every buyer is unique as well and each will have their own needs that need to be met before they will buy your business.

Slide 5:  The most commonly used formula or guideline for valuing a business is the “Acid Test”

This simple formula has been around since businesses began and still holds water today, especially if the business has been consistent.  The acid test, in short, is the amount of time it will take for an investor or buyer to get a return on their initial investment after paying their new debt service with interest, and a good salary that is normal for that market.

There are other factors that can affect this test as well, such as large capital equipment assets, and changing market conditions.

Slide 6:  Here is an example of the “Acid Test” for a common, consistent business.  The example is for a business that sold for $ 829,000 dollars with a $ 500,000 dollar down payment and a note to the owner for the balance.  This business sold because it met the common business goals of buyers. This particular buyer had 3 requirements.

1. He required a good salary for his efforts of $ 140,000
2. He required an annual return on his investment of at least 15%
3. And his last requirement was that he could pay off his initial investment in less than 5 years.

The sale price of $ 829,000 was determined solely by what the business can afford. Not by the needs and wants of the seller.  This test, more than anything else, will determine the value of your business.

Other factors can also affect the value, so you should ask your professional intermediary about additional factors that are prevalent in your industry and region.

Slide 7: Many sellers tend to overstate the value of their business.  It is their baby.  They have built it up, worked it hard, and expect to be rewarded.  That reward will be determined by what your business can sustain in the industry.  If your industry requires significant assets or inventory, an upward adjustment to the sale price can be made.  Likewise, if these assets and inventory no longer produce income, there is often no choice but to just liquidate.

From a buyer’s perspective, there may be other factors that affect your sales price as well, for example:

• The ease someone can start-up a competitive business on their own.
• New technology that has high growth potential
• The amount of Competition
• Industry Trends
• The Level of Risk the buyer will assume

A professional intermediary will be able to help you navigate through your industry trends.  Comparable listings and comparable sales will also help you determine the value of your business.

Slide 8: Again. On behalf of Edison Avenue,  I would like to thank you for listening.  If you have any questions regarding preparing your business for sale, please do not hesitate to contact Edison Avenue for a complimentary consultation. I wish you the best of luck in pursuing your after sale dreams, and encourage you to select our team of professionals to help you through the process.

Written by Eric J. Gall

For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.