How Much Is My Business Worth?
Most business owners have never had a chance to sell a business in Pennsylvania before, and as a result, they typically don’t know the true worth of their business.
Since 1979, VR Business Brokers has helped hundreds of thousands of small to medium sized businessowners gain insight into the exact worth of their businesses. No two businesses are the same. Every business valuation must take into account the specifics of your business.
To understand how businesses are valued, there are four key value factors:
- Seller’s discretionary earnings.
- Desirability/ strategic value.
- Risk.
- Terms of Sale.
Seller’s Discretionary Earnings
The foundation of value, especially in the market for small- to medium-sized businesses, is Seller’s Discretionary Earnings (SDE)-the total cash flow benefiting the owner. Calculating SDE is a bit tricky, so it’s advisable to obtain the services of a professional experienced in valuations. The approach is to consider not just the net income, but all the recurring cash benefit flowing through to the owner as follows:
Net Income
- Owner salary.
- “Discretionary expenses” (e.g., health insurance, optional travel & entertainment, personal use of products).
- Non cash expenses (e.g., amortization and some depreciation).
- Non-recurring expenses (or minus non-recurring income).
- Non-operating expenses (e.g., interest payments, or minus non-operating income).
- Seller’s Discretionary Earnings.
It is important to remember that the when someone purchases a business for sale in Bucks County, they are buying an income stream. The more seller discretionary earnings a business is generating, the more that business tends to be worth; however, this relationship is not necessarily a linear one. A general rule is that a business typically sells for 1.5 to 3 times that annual SDE and businesses that score well on terms, desirability and risks can see the multiple increase.
Desirability/Strategic Value
Factors in this category include:
- Level of SDE (higher SDEs get higher value multiples).
- Strategic value (primarily for larger and technology driven businesses).
- The fun and ease of operating the business.
- Location.
- Facilities.
- Employee relations.
- Operating hours.
- Growth potential.
Risk
Factors in this category include:
- Years in business and with the current owner.
- Profit trend.
- Quality of books and records.
- Franchise membership.
- Brand recognition/strength.
- Level of competition.
- Dependence on current owner.
- Diversification of customer base.
- Lease length and terms.
- Asset value.
Terms of Sale
This is the one source of value that the business seller can almost completely control. Components of the terms include:
- Down payment.
- Interest rate Monthly payment.
- Non compete agreement.
- Seller training of buyer.
The first three components of the terms of sale assume that the seller is providing financing to the buyer of the business, which happens in the majority of sales, with seller financing. The seller receives part of the purchase price at the time of the sale (“the down payment”) and the remainder over several years. The buyer uses the cash flow from the business to pay off the debt. Structuring a sale with attractive terms can significantly increase the value of a business for sale in Pennsylvania.
Wonder no more.
Contact VR Business Brokers for a free, no-obligation estimate of the value of your business.