The primary concern for our sellers when considering a sale and for most buyers when acquiring a company is the valuation. However, there is no straightforward solution, and the issue becomes even more complex as there may be multiple valid answers. This is due to the fact that business valuation is an art rather than a science, and appraisers' judgment, expertise, and methodology quality heavily influence valuations. Business valuations are subject to various standards of value, which can lead to different values being assigned.
The fair market value of a property is the price agreed upon by a willing buyer and a willing seller, both of whom are not obligated to buy or sell and possess adequate knowledge of the pertinent information.
The stock values that are of interest to investors depend on a range of factors, such as the company's financial performance, market trends, industry outlook, and macroeconomic conditions. Investors typically evaluate a company's revenue, profit margins, earnings per share, and other financial metrics to assess its financial health and growth prospects, which can inform their investment decisions in the stock market.
Legal standards for valuation are commonly employed in divorce cases to determine the value of assets.
The value of a business to certain buyers may exceed its fair market value.
In simple terms, the value of your business is determined by a multiple of your previous earnings, assuming that the buyer has confidence that your future earnings will remain steady following the acquisition.
To determine what to multiply, we need to consider which metric is most appropriate for your business. When valuing small businesses with earnings below $1 million, we typically use owner's benefit, which is calculated by adding the net income, depreciation, interest, owner's salary, and fringe benefits. In essence, this reflects the total income available to a single owner if the company had no debt. For larger businesses, EBITDA is typically used, and this metric includes a normalized salary and benefits package for an executive to manage the business.
The multiples applied to owner benefit can vary significantly, ranging from below one up to three. For larger companies with EBITDA nearing or exceeding one million, multiples can range from four to six. However, it's important to note that these multiples are not set in stone. The appropriate multiple for your business will depend on various factors, including the size, quality, and verifiability of your owner's benefit. If your business has poor financials, a bleak future, negative growth, or minimal profits, it is likely to command a lower multiple. Conversely, if your business has strong financials, a bright future, and robust growth potential, it is more likely to command a higher multiple.
The ultimate sale price of a business is determined by the buyer, rather than valuation experts. As a result, it's impossible for anyone, including your banker, CPA, lawyer, broker, or even your mother-in-law, to tell you precisely what your business is worth. The only person who can provide an accurate valuation is the buyer who ultimately acquires the business, and even that is a subjective assessment. Different buyers will value the same business differently, meaning that there is no objective measure of a business's worth.