Business Insider: Do you know the worth of your business?

Photo: Jirapong Manustrong/iStock / Getty Images Plus/Getty Images

The value of your business depends on some important details. The valuation process is quite subjective, but there are two objective statements we can make with confidence.

First, owners really care about the value of their business. Valuation matters in a variety of circumstances. Second, owners often think their business is worth more than it really is. In many instances, owners learn that their business is not valued by the rest of the world as greatly as it is to them.

So, what is a business owner to do? How are businesses valued in our industry? Where can an owner turn for help?

Work with an expert

One place to start is with a valuation expert. Focus on the different certification programs available. Pay close attention to the minimum requirements of the certification process. Some of these are the ABV by AICPA, ASA by ASA, AVA by NACVA, CBA by IBA, and CVA by AICPA. Full-service accounting and legal firms have these folks on staff. Keep in mind that these people may or may not have experience in our industry.

You may be thinking that working with a certified valuation expert will be expensive. It may be, but it’s all relative. If you sell your business for a higher multiple because you equipped yourself with qualified advisers, the cost of an expert valuation will be insignificant.

Work your network

At the other extreme is the DIY method. Who do you know who has already gone through the process you’re considering (selling, divesting a partner, etc.)? Talk to your peer group members, trade association contacts and your company’s advisers.

At the end of the day, a business, like any other asset, is only worth what someone else is willing to pay for it. A highly motivated buyer may pay a premium for the opportunity to integrate the business, expand into a new region or for another strategic reason. On the other hand, auction buyers may seek a discount because they intend to sell off the parts of the business for whatever value.

Tabulation methods

Valuation experts use various methodologies for calculating business value. However, the essential ingredients are the same. The first component is the value of the real estate, equipment, vehicles and all other assets. The key with this component is to value the assets at a fair market value price, not an auction or fire-sale price and not an unrealistic, overly hopeful price. If you had a reasonable amount of time to sell these assets to an interested buyer, what would the total of these assets be worth?

The next component is the value of the business itself, separate from the assets and real estate. The starting point here is your earnings before interest, taxes, depreciation and amortization (EBITDA) — your “true” profit. The key here is to add back into your EBITDA any expenses you, as the owner, take that a buyer will no longer need to pay for. For example, let’s say your business pays your boat payment, legitimately. A buyer will not continue paying on your boat, so you need to add that expense back into your EBITDA calculation.

When calculating EBITDA, the other consideration is the trajectory over the past several years. Looking at a few years gives more information than only looking at last year or the last two years. When EBITDA is growing year-over-year, the business is more valuable.

The last component is to apply the multiplier to EBITDA. The multiplier is determined by how hot the market is. A multiple of two doubles your EBITDA. A multiple of three triples your EBITDA. This is where an expert with industry knowledge will be helpful.

There are other ways to value a business and different industries have different methods. In some industries, businesses are valued in terms of multiples of revenue. Wouldn’t that be nice?

Best wishes for valuing your business. If you have any questions, please feel free to shoot me an email. Now go forth.