I help business owners find an ideal buyer for their business everyday and the foremost question on all buyers and sellers mind is how much money is the business worth? The answer to that questions is a business is worth exactly what a buyer is willing to pay for it. Interestingly, there is actually a method to finding that magic number and that’s exactly what I will explain in this article.
We will first need to find the Seller Discretionary Cashflow in order to properly value the price of a business. Seller Discretionary Cashflow is a term used to describe the money that a business owner actually benefits from in its entirety. This basically takes into account the Net Income plus any expenses and deductions considered to be of benefit to the business owner. Examples of such expenses and deductions also referred to as “Add Backs” are: compensation to the owner, amortization, depreciation, certain inventory losses, a health insurance plan, a car payment, a mobile phone payment or even entertainment. It is fairly easy to determine Seller Discretionary Cashflow by simply reviewing a recent Profit & Loss of the business.
Let’s say a Bed & Breakfast had a tax return profit of $50,000.00 which would be the starting point for several add backs. For instance, if the owner was paid a salary of $40,000 and the business had $15,000 in depreciation, $15,000 in amortization, $8,000 for a personal vehicle, $2,000 for a cell phone PLUS Dry Cleaning, Clothing, Entertainment, Travel of $15,000 the Seller Discretionary Cashflow would be $145,000.00
Once you have the Seller Discretionary Cashflow now it is time to determine the proper ratio the Cashflow will be multiplied in order to determine the price. This ratio is similar to finding comparable properties for a real estate appraisal and is based on the sales price of other similar type of businesses and varies for each business and industry. A real estate appraisal is valued at the sales price of previous sales divided by the square footage of the home and a business is the sales price of previous business sales divided by the cash flow of the business. This ratio is the magic formula to finding out how much money a business is worth.
Let’s say the same Bed & Breakfast with the Cashflow of $145,000.00 was being valued and similar types of businesses have sold for 1.8 times the Cashflow, the Bed & Breakfast business is then valued at $260,000.00 Now let’s say the owners of the Bed & Breakfast also own the business real estate and the real estate is worth somewhere around $700,000.00 Then the business will be listed all together with the price of $1,000,000.00 which is the business plus the purchase of the real estate.
It typically costs a business owner $3,000.00 to $4,000.00 for a professional business valuation however I provide free business valuations for my clients so if you would like to find out how much your business is worth please feel free to contact me anytime through LinkedIn, Call, Text or Email asking for a free business valuation. Thank you!
Author: Robert Valdez, GoldStar Business Brokers, (602) 475-7273, [email protected]