A business has tangible and intangible assets. The tangible assets are the furniture, fixtures, equipment, inventory, and real estate. The intangible assets can include the trade name, contracts, leases, client lists, licenses, recipes, and patents.
A business provides a certain financial benefit to the owner. The benefit generally comes in the form of business profits and a salary to the owner. It can also provide the owner with fringe benefits such as health insurance, a company car, or a retirement plan.
Owner operated businesses with sales of $1 million or less generally sell for the value of the assets, plus one to three times the earnings. If the earnings are stable and growing, the value is on the higher end. If the earnings are variable or declining, the value is on the lower end.
Businesses with sales of $1 million to $10 million may sell for straight earnings multiples of three to six. A thorough investigation of the financial information is required to uncover the true earnings capability of the business. Again, if the earnings are stable and growing, a higher multiple is used. If the earnings are variable or declining, a lower multiple is used.
Businesses with sales of more than $10 million often have specific industry criteria, which may be applied to determine the value. At this level, Buyers may be paying for market share, rights to patents and processes, additions to product lines, or the benefits of strategic or administrative consolidation.
Most industries have one of more rules or thumb. However, they can vary widely and in most cases do not give an accurate value of a business. Since each business is unique, a particular rule of thumb can be off by as much as 100% or more. The business valuator will be able to decide what is the most relevant information about a business and then make an informed decision about its value.
Business valuation is as much an art as a science. While the business valuator does employ standardized formulas and methods to calculate value, he works from assumptions that are based on his experience in the market place and his familiarity with the similar businesses. This process includes the selection of the most appropriate risk and return variables. In this way, his applied expertise leads to the best calculations of value for a specific business.
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