How Much is Your Business Worth?

photo - how much biz worth by AlanThinking about selling your business? Maybe you’ve put in enough time and energy into it and you feel it’s time to retire or you want to start a new business. One of the first things you need to figure out is how much your business is worth. You’ll need to know that in order to plan that retirement or decide how much money you’ll have to invest into that new venture.

About 10,000 businesses sell for less than $500 million each year in the United States, according to an article by Tomasz Tunguz in Inc. magazine. There will be thousands more businesses on the market in the future.

  • Many privately owned businesses are owned by those reaching retirement age who will want to sell.
  • The Bush-era tax cuts of estate taxes are in their sunset years and currently the real property of an estate (including a proprietorship, partnership or closely held enterprise) more than $5.34 million is taxed at a substantial 40%, a Forbes article points out.  That’s a lot of value that will end up going to The Tax Man if a business that size isn’t sold before the owner’s death and another factor encouraging sales.
  • There are many people leaving the corporate world (by choice or necessity) looking to buy businesses.
  • There is a lot of money from investors overseas looking for the security and opportunities that come with owning a US business.
  • Many larger corporations have large cash reserves that they may want to spend on mergers and acquisitions.

Tunguz points out a valuation tool by the company Axial. It’s very simple (as long as you have the information requested) and uses a discounted cash flow analysis to come up with a figure that represents as estimate of the value of your business. It works best with profitable businesses, not so well for start ups.

In order to use it, you need to supply some contact information (nothing is really free these days) but you don’t have to talk to Axial (it links buyers and sellers of medium sized and large businesses and investors) if you don’t want to.

Business valuation is difficult, according to a CNBC article, because there are so many variables and it calls for predicting the future.

  • The evaluator looks at the industry the business is part of. Is the industry changing rapidly? Booming or declining? How easy is it for competitors to enter the market?
  • How does the business interact with the industry as a whole? What’s the market share? How strong are the relationships with customers, suppliers and bankers?  Is real estate involved as well as the business itself?
  • Corporate financial statements, including tax returns, should reveal what the company brings in and what it pays out.
  • A business valuator usually will estimate future profits or cash flows then capitalize the value (using a certain multiple of annual profits to arrive at a present value) or take the estimated future cash flow estimates and then discount them to today (to reflect the time value of money and the risks that future growth projections might not be accurate).

Whether you’re buying or selling a business, a valuation is a key step in that process. There are also many legal issues involved in buying and selling a business and we can help you overcome or avoid problems during the process. Call my office so we can talk about the transaction.