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What’s Your Business Worth?


If you think you can command big bucks for the sale of your business, then think again. According to INC magazine, the median sale price for private companies fell 27 percent when the recession first hit in 2008. The average company sold for about $400,000, compared to $551,000 a year prior. Furthermore, stats in 122 different industries dropped – service companies by 23 percent, and financial / insurance / real estate firms by 61 percent. The bad news is that it’s still a buyer’s market out there and you are most assuredly overvaluing your business.

“Much of my time is spent on the less glamorous tasks of educating business owners on how the marketplace will view – and value – their business, and helping them set realistic expectations for the arduous process of selling,” explains Barbara Taylor in a New York Times piece. “In short,” she says, “I’ve had to learn the fine art of being a downer.”

 

Choosing A Number For Your Company

Doing your research can help you find a sound basis for pricing. Surf BizBuySell.com and BizQuest.com to look up what comparable companies are fetching on the market in your geographic region. Talk to lawyers and accountants who have experience working with startups in your niche. You can make your research more fun by taking three professionals in mergers and acquisitions out to lunch and picking their brains. That’s what angel investor John Warrilow did with one of his companies – and he said the estimates rattled off by the pros wound up being +/- 25 percent of the actual selling price. Other good resources include BVResources.com and M&A firms’ newsletters.   

 

A Checklist For Determining Your Company’s Worth

  • How stable is your company’s revenue stream? (You’ll fetch higher value if you can demonstrate several years’ worth of profit statements that prove you receive recurring revenue from a dedicated base of customers.)
  • Are your customers reliable? (If your business provides service, it’s especially important that you have customers who pay their bills on time. You want to show your profits come from a large pool of clients.)
  • Do you have high gross profit margins? (If your profit margins are large, there is more room for error and less risk involved for prospective investors. Every percentage point improves business valuation.)
  • Do you have any competitive advantages? (Owning patents, trademarks, trade secrets or copyrights will all give your business more value. Federal law will protect certain aspects of your business and block competition.)   
  • Is your brand strong? (Reputation and sound management are huge business assets. Valuation experts will look at licensing potential and the ability to apply your brand name to other products and services.)
  • Does your business require high overhead expenses? (Businesses that can operate lean with low overhead expenses will value higher. For instance, an outdoor fitness boot camp will fetch more than a big box gym.)

 

What About Not-So-Profitable Businesses?

Keep in mind that businesses that are not churning a profit are not worth very much – so, even if you think there is potential for the right buyer, that doesn’t mean a thing. Startups may need to project how many years it will take to become profitable; so if you think your business is worth about $5 million when profitable in about 5 years’ time, you may have to sell for $1 million at this juncture.

 

Looking Past Dollars & Cents

Beyond value, you’ll want to consider other aspects of the sale. You may prefer a buyer who offers cash, versus a buyer looking for financing. You may also want to look for someone with a professional background that can preserve the reputation and legacy you’ve created. Just as running your business was about more than “just a profit,” so should selling be more than a number.  

 

 

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Resources:
INC: A Buyer's Market -- What Is Your Business Worth Now?
INC: How To Find Our What Your Business Is Really Worth
NY Times: The Truth About What Your Business Is Worth
Entrepreneur: How To Value Your Startup
Fox News: What’s Your Business Worth?

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