Business Valuation? What is my Business Worth?
In the last 20 years as a Business Broker in Houston here’s the question I’ve been asked by small business owners approximately 10,000 times:
“What is my small business worth?”
Intuitively, we know this can be a complex question to answer but nearly every business owner wants a simple, easy answer and, unfortunately, too many business brokers, CPAs and fishing buddies are more than happy to give them the simple and incorrect answer.
The process of coming to a price for a small business is like making a complex meal. You put in a lot of ingredients to get the result. What are the ingredients for pricing a small business?
- Sales revenue – is the business growing? Shrinking? Is it volatile year-to-year?
- Profits – after adjusting for the owners often way too complex or obscured earnings, what profit is the business actually making?
- Customer Concentration – Is the largest customer a large part of the total business sales? Is it the same large customer every year? What is the risk of losing that customer?
- Vendor concentration – is the business dependent on a critical supplier? Is there a replacement supplier if something goes wrong?
- What family members are involved in the business?
- Are there big industry or regulatory changes in the works? Good or bad?
- Financial records – Does the profit and loss statement accurately reflect the financial performance of the business? Can the tax returns and P&L be reconciled easily?
- Is the accounting done on a cash basis? Accrual? Are Tax returns and financial statements prepared with consistent accounting principles?
- What is the current interest rate environment? Generally speaking the higher the interest rates the lower the business value to a buyer due to the higher cost of borrowing to pay for the business.
And there are about 12 – 15 more issues that need to be considered when determining what a buyer might be willing to pay for the business.
My advice is to ignore “Rule of Thumb” business pricing methods and instead, have a confidential discussion with a Sunbelt professional who can guide you thru the process of determining what is an appropriate price for your business in today’s market.
The Role of Formal Valuations and Business Appraisals
There are circumstances when a formal business valuation is the best path for the business owners. You can click here for a description of the different formal valuations available and what circumstances that they are designed to accommodate.