How to Recognize What a Company is Really Worth and Setting the Acquistion Value.

Setting an selling price is a process that causes lots of concern. Sellers do not want to leave money on the table by setting an selling price that is too low. In the alternative, an asking price that is too excessive can deter qualified potential buyers from inquiring about the business. Sellers need to determine how much money is necessary from the proceeds of the purchase to achieve their goals. Once a Seller determines how much is required, they should then contact a business broker to get an opinion of value. Ultimately, the value of a business is decided by what a buyer is ready to pay out for it. Each Business has its own distinctive set of circumstances that set it apart from others. I have heard potential buyers and other business brokers declare that business value is all about the figures. I agree with this statement to the extent that the figures have to be there. Two companies with exactly the same financials, however, can have very different valuations. A business making $300,000 a year cash flow with two clients is going to be worth a lot less than a business doing $300,000 a year cash flow with a hundred clients. A business with up trending revenues and profits will be worth more than a company with down trending revenues and profits. Most savvy buyers will conduct a risk evaluation and make a reduction for riskier businesses. Ordinarily most businesses are valued as a "Multiple of Cash Flow.” Cash flow, or owners discretionary income, is the number that is calculated by adding interest, amortization, depreciation, extra-ordinary expenses, owner's income and other discretionary items to the net income line of the business. For example, the multiple for a traditional retail-clothing store may be 2.0. If the cash flow is $500,000, the price tag of the company would then be $1,000,000. Most buyers average the previous three years of cash flow when the company is in an uptrend and only look at the last year of cash flow when the business is in a downtrend. This is simply because it is more advantageous to them. Banks, however, will look at the last three years and come up with a weighted average. Generally speaking, the higher the cash flow number, the greater the multiple. An additional approach for determining business value is referred to as a comparable sales analysis. This is another reliable indicator as to the value of a business. This is done by checking the sale amounts of recently sold businesses that are of a related industry and have identical financials. Once a business broker finds reliable comparables, an average cash flow multiple can be established. A range from low to high can also be set. A business broker ought to be able to tell an owner what the company really should sell for on the higher end, on the low end and on the average. As a business broker from the Philadelphia area, our office has performed a lot of market comparisons for business owners. There are several other methods and formulas that are applied when valuing a company that would be too hard to describe here. Using a combo of the Market Comparable Analysis in conjunction with the Multiple of Cash Flow Analysis, should give an owner a sensible idea as to what their company is worth and what to value it at.

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