Business Valuation Multiples - How to Choose the Right Multiple For Your Business

Using a "Multiple of Earnings" is the most popular way to value small businesses that are for sale.

But that raises a difficult question: By what number do you multiply your earnings?

Much of what has been written about valuation multiples states that most businesses are sold with a multiple that ranges from 1-5.

But in truth, smaller businesses that sell for 4 or 5 time their earnings are rare - at least when it comes to owner-managed businesses.

In smaller businesses with an owner's benefit of $50,000 to about $250,000, the owner will usually also manage the business on a day to day basis. The buyer is in truth "buying a job". Their return on investment is much lower because they are investing not just there money but there time.

In larger businesses, where there is enough cash flow to hire a full time, professional manager the owner can make a return on his investment without a full time commitment - so that business will be valued at a much higher level.
That's not to say you can't sell your business for a multiple of 4 or 5, but in my experience the vast majority of smaller businesses sell for a figure much closer to 1 to 3.

So I suggest you start with a multiple of 2.0 and use the list of factors below to adjust the multiple up and down based on your specific situation and you company's performance.

This is just a partial list to get you started, there are bound to be unique factors that affect your business that are not listed here.

Positive Factors That Can Increase the Multiple

*Sales and profits have risen consistently each year for at least 3 years.

*A significant amount of sales come from repeat customers. Even better is revenue that comes from automatically recurring charges. Web hosting, alarm monitoring and self storage are few examples of business that may have reliable repeat revenue each month.

*Proprietary products, patents and/or trademarks.

*Exclusive rights to a territory.

*Less warranty exposure than is typical in your industry.

*Management And /or employees will stay on after the sale. The more experienced or uniquely talented these people are, the better.

*The business is a franchise of a well established - And well known - company. For many buyers, the support and training they get from the franchisor is a major plus - one they are willing to pay for.

*Your industry is growing and the future appears bright.

*Important ratios such as profit margin And cost of sales are above average for you industry.

*You are offering above average financing terms

For these last two items you should check with any trade associations that serve your industry. They may be able to provide you with facts and statistics that can help you show the buyer that your business is part of a growing industry or trend.

Negative Factors That Can Decrease the Multiple

*Sales and profits have been trending down recently.

*Sale and profits have been inconsistent or unpredictable in the recent past.

*Sales from your most important product have been down or stagnant.

*One customer accounts for a large portion of your sales - more than 20%.

*There are many businesses similar to yours that are also for sale. Or your products are widely available at many places - a "Me To" product a line.

*The business relies heavily on location for its success but the lease is not transferable or is about to expire. If this applies to your business, try to get an extension on your lease before you start to sell.

*Pending legal or government issues such as law suits or environmental concerns.

*Important ratios such as profit margin and cost of sales are below average for you industry.

*A large amount of obsolete inventory.

*The business is part of a weak franchise or one with a bad reputation.

*Too many old accounts receivable that will never be collected.

*You are not offering any financing

How Do These Factors Affect the Price?

Sellers tend to focus mainly on the positive factors when talking to buyers.

Buyers, however, tend to zero in on the negatives - or what they perceive to be negative. They are averse to risk and so they will always be on the lookout for problems.

If any of the negative factors listed above exist in your business you are not alone. Almost every business has some problems and they should not stop you from successfully selling.

That these problems exist isn't the issue, how you deal with them is.

You have several choices when it comes to the weak points of your business.

You can lower your price accordingly and show the buyer how and why you have discounted your price by lowering the multiple, you can ignore the issues and wait for the buyer to point them out, and you can fix the things that are fixable.

Or you can do a combination of all the above.

If you have old or obsolete inventory, get rid of it and take the lose. The same holds true for old accounts receivable. The buyer will not pay you any money for these things and they will only help to create a negative overall impression of the health of your business.

Other factors - such as a decline in sales in recent years or one customer accounting for much of your revenue - can't be fixed so easily in the short term. If you don't have the option of holding on to the business for another year or two so you can improve these things than you will have to adjust the price accordingly.

Finally, there are those items that you don't control such as the fact that there are many similar businesses on the market or you are part of a franchise that is struggling.

I would suggest that you not lower your original asking price because of these items. But be aware that the buyer will probably bring them up at some point so be prepared to deal with them.

Before lowering your price, try first to offset any of these negatives with some of the positives features of your business. Maybe there are many businesses similar to yours on the market, but if your profits have steadily increased over the last few years or if you have a favorable lease in place that is transferable, you can show the buyer how your business is worth the price you are asking.

AUSTIN BUSINESS VALUATION

SAN ANTONIO BUSINESS VALUATION

Patrick Jennings is the founder of several web sites related to the buying and selling of small businesses including http://www.TheBizSeller.com - a for-sale-by-owner site that helps you sell your business as fast as possible and without using a broker. His How To Sell Your Business videos are locate at: http://www.youtube.com/thebizseller

Article Source: [http://EzineArticles.com/?Business-Valuation-Multiples---How-to-Choose-the-Right-Multiple-For-Your-Business&id=4278953] Business Valuation Multiples - How to Choose the Right Multiple For Your Business

A Guide For First Time Business Buyers

Owning your own business can be very rewarding both financially and emotionally. Business ownership provides innumerable opportunities to put ideas into action and reap the rewards (and sometimes the pain).

Buying a business, rather than starting a business from scratch, has many advantages:

The business should have established customers who will provide revenues for the business almost immediately. Unlike a start-up business that needs to find customers and take them away from another business, the business buyer must retain it's existing customers. It's always easier and less expensive to retain customers than to try to find new customers.

The business you buy will have systems in place that you do not need to invent. Although it's rare for any business to have perfect systems, the business you buy will certainly have a certain way of doing things. Business buyers should always make certain they understand why the former business owner did things BEFORE changing it. The laws of unintended consequences are inescapable. Make sure you know exactly what effect changes will have before you make changes.

Financing the Purchase of the Business

Financing a business purchase is important and should be considered carefully. For businesses valued under $2,000,000 the primary financing options are the lenders who offer Small Business Administration (SBA) guaranteed loans or the business seller.

What are the advantages or disadvantages of each?

First let's look at Seller financing.

Many books on "How to buy a business" claim that a buyer should not buy a business if the seller isn't willing to finance the sale of the business. The books often say to offer the seller 25% - 40% as a down payment then pay the balance off over 5 -10 years. The theory is that the seller who finances the sale has confidence in the business and, since the buyer owes the seller money, the seller will "help" the buyer succeed.

Makes sense, right? Not so fast. Let's look at seller financing from the perspective of a business owner who wishes to sell a good business. A seller who sells the business and finances the sale takes HUGE risks. What are the risks? First, what if the buyer ignores the seller and runs the business into the ground? What if the buyer changes the whole business operation to a model that doesn't work? What if the buyer is terrible with employees and he loses some? The "experts" say so what, the seller gets the business back and still has the buyer's down payment. Sellers of good businesses don't want the business "back". If they wanted the business back they wouldn't be selling it.

Here is another reason why a business owner who wants to sell a good business shouldn't need to finance the sale and why a buyer shouldn't want the seller to finance the deal either. SBA lenders often receive a government guarantee on a business acquisition loan (7A) of about 75%. This means an SBA lender can't lose more than 25% even if the business fails and the loan goes bad. If the seller finances the deal the seller does NOT have a 75% guarantee so seller's who finance deals should charge a lot more for financing (or selling price) to account for the increased risk compared to an SBA loan. This increase in financing costs puts more leverage on the buyer and actually INCREASES the likelihood the business will fail. That's bad for the buyer and the seller.

Another common reason for seller financing is many "experts" say that small business records are so bad that only the seller knows if the business is making a profit so a seller who is willing to finance is defacto saying the business is profitable. As always, two sides to the story. Here's an example of why this is a fallacy. Let's say Mary owns a business that does carpet cleaning and some customers pay by credit card, some by check and some cash. Let's assume for whatever reason the cash income can't be identified in the company books. The books show the business is making a marginal profit but Mary says she gets about $1,000 per week in cash that needs to be considered when judging the selling price.

The books show the business is making about $20,000 per year, Mary says she's taking another $50,000 that can't be identified in the books. That's a total of $70,000 and Mary wants to sell the business for $140,000. She'll take $64,000 down and a note for 5 years at 8%. Good deal? 2 times earnings is a good deal, seller financing is good, right? Wrong. What if Mary is lying about the $50,000? You bought the business, she has your $64,000 (which is more than the books show she makes in 3 years). So you stop making payments and Mary gets the business back. Who got the better deal, Mary or the buyer?

TIP: If a business has provable cash flow and a reasonable price AND a buyer whose financial circumstance is in order, there is an SBA lender who will provide financing. There are plenty of businesses available that have provable cash flow. Inexperienced buyers should be very, very cautious about purchasing a business where the earnings can not be ascertained with reasonable certainty.

Advantages of SBA financing

Understanding the steps in getting an SBA loan makes it clear why the buyer and seller are both generally better off if the seller does not finance a transaction.

Requirements of buyer to get an SBA loan: good credit, manageable debt relative to the ability of the buyer to service the debt, buyer income requirements BELOW that which can be provided by the buyer and business.

Requirements for business to be eligible to be purchased with SBA loan: provable earnings of business adequate to make debt payments and income to seller adequate to meet sellers's personal needs, business will likely be appraised by bank to make sure what the buyer is paying for the business is reasonable.

A buyer benefits using SBA for financing because the SBA will likely add discipline to the process for the buyer and reduce the likelihood that a buyer will make a critical mistake.

Due Diligence

Buyers - Before closing on the purchase of a business buyers should conduct adequate due diligence to ascertain if what they "think" they are buying is actually what they are buying. Due Diligence has 4 primary areas:

Industry - There is usually public information available for almost any industry. Buyers should do research to see if there are any industry issues that will positively or negatively impact the business.

Business Finances - Business buyers should retain an accountant to assist them in looking at the business books to confirm the business is earning what is claimed by the seller.

Business Operations - Before closing there is usually only so much that can be done. An important activity is to meet with the seller and discuss in detail what the seller does on a day-to-day basis so the buyer can get comfortable either filling that roll or bringing in people to fill that roll. If the seller is the guy who also repairs all the trucks then you either need to be able to repair the trucks or find someone who can!

Legal - Buyers should engage an attorney to review closing documents and make sure that the buyer understands their rights and obligations in any contracts. Good legal work BEFORE closing usually means smoother sailing after the business purchase.

Buying a business could be the best thing you ever do or maybe the worst thing. Many businesses are sold every year and the vast majority of those transactions turn out to be good for the buyer and the seller. Do your homework and you will likely be rewarded handsomely.

AUSTIN BUSINESS VALUATION
SAN ANTONIO BUSINESS VALUATION


DAN ELLIOTT:
Mr. Elliott is a Certified Business Intermediary as designated by the International Business Brokers Association. A member of the Institute of Business Appraisers,International Business Brokers Association and the M & A Source (a national organization of Merger and Acquisition specialists).Over 10 years experience in mergers, acquisitions and business sales. Experienced in representing companies with revenue up to $50,000,000. Extensive experience in Business Valuation services to determine Fair Market Values for businesses. Mr. Elliott has extensive expertise in distribution, service and manufacturing businesses. Article Source: [http://EzineArticles.com/?A-Guide-For-First-Time-Business-Buyers&id=592466] A Guide For First Time Business Buyers

Demystifying Business Valuations

By Mitch Biggs

Business valuations are one of the least understood tools for a business owner. There are many reasons to perform a business valuation. These include but are not limited to buying a business, selling a business, financing expansion, estate planning, retirement planning, protecting owner income and equity, modifying ownership and unfortunately, owner divorce.

You should expect to pay over $3,000 for your valuation. Depending on your annual revenue and situation the fee could be closer to $10,000. It is worth every penny provided you find a reputable service.

Business valuations are much more complex than taking an industry multiple and doing some simple math. Steer clear of $199 wonder offers you may be presented. A good business valuation will provide the owner with the tangible asset value and the intangible asset value. Most businesses will have a strong intangible asset value. If you've worked years to build a loyal customer base, you deserve credit for that intangible asset. This is very lucrative in the eyes of a buyer, but hard to find on the line item for any loan application.

Quality business valuations will actually evaluate your business through at least 3 lenses. Each lens is designed to approximate or reveal the Fair Market Value (FMV) of the business. Below are three of the most common approaches used in business valuations.

1. Asset Based Approach
2. Income Based Approach
3. Market Based Approach

Asset based or Book Value is an accounting formula that subtracts total liabilities from total assets. Typically, low cash flow asset-rich companies score well using this approach.

Income based approach is all about earnings and cash flow. Sustained income streams are capitalized into an operating value. You need more than a financail calculator to get the right answer with this approach.

Market based approach is the most direct approach for determining fair market value. This approach utilizes pricing from guideline public companies (when and if available) and from private transactions (Merger and Acquisitions) markets. These companies are referred to as guideline companies because no two companies are truly comparable.

Avoid using your accountant for a business valuation. A good accountant is best maximizing your deductions through depreciation of assets, company vehicles, health care, retirement funding and other tax friendly strategies. These deductions can and will be unraveled to recast the financial statements to optimize fair market value. Don't worry, the IRS does not have access to business valuations and courts have upheld they can not be used for tax audits.

At the end of the day you want to know the most a buyer will pay for your business under the current marketplace. Most accountants do not understand the effect proper terms and deal structure have on purchase price. They have limited resources to analyze what the genuine supply and demand a specific business will generate in the marketplace.

If you are getting a valuation to determine a selling price, make sure the valuation includes a Justification of Purchase Test (JOPT) and debt service analysis.

Don't step over dollars to pick up pennies. You would be sick after closing a deal knowing the buyer would have paid $100,000 more all because you did not have a quality business valuation and the buyer did. It happens all the time. You know if your business is priced too high -- it doesn't sell.

Mitch Biggs spent 14 years flying F-15s for the USAF. Then he transitioned to a Fortune 200 company. As a Director, he left and is now semi-retired mentoring aspiring entrepreneurs. Follow me on Twitter @BizWingman. Please visit my [http://bizwingman.com/]Blog. There is a video that takes you inside the F-15 cockpit on a mission. Pretty Cool!

Article Source: [http://EzineArticles.com/?Demystifying-Business-Valuations&id=3565473] Demystifying Business Valuations

Top Ten Business Valuation Questions for Business Appraisers

Author: Robert M Clinger III

Having performed business valuations for a variety of purposes, I have been asked a number of questions from clients. The following top ten business valuation questions have been compiled in an effort to briefly address some of the most frequent concerns clients have regarding a business appraisal.

1. What approaches do you consider in valuing the business?

Income Approach-The Income Approach derives an indication of value based on the sum of the present value of expected economic benefits associated with the company. Under the Income Approach, the appraiser may select a multi-period discounted future income method or a single period capitalization method.

Market Approach-The market approach derives an indication of value by comparing the company to other similar companies that have been sold in the past. Under the market approach, the appraiser may utilize the guideline publicly traded company method or the direct market data method.

Asset Approach-The Asset Approach adjusts a company's assets and liabilities to their fair market values and adds to the value of intangible assets and any contingent liabilities.

2. What discounts may be applicable?

The discounts typically used in the valuation of a closely held business interest include a discount for lack of control, discount for lack of marketability, discount for lack of voting rights, blockage discount, portfolio discount, and key person discount. The most common discounts applied in business valuations are discounts for lack of control and discounts for lack of marketability.


3. What are the standards of value?

For most operating businesses, the standard of value will likely be fair market value, fair value, or investment value.

Fair Market Value is the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant fact.

Fair Value is a legal standard of value that has been established by the courts for use in issues ranging from marital dissolution to dissenting shareholder suits.

Investment Value is the value to a particular investor based on individual investment requirements and expectations. Investment value is typically used for transactional purposes when an acquirer is assessing the value of the target company, including the potential synergies of the deal.

4. What is the difference between an appraisal and a fairness opinion?

Full/formal business valuations typically consider all relevant approaches and methods that the appraiser considers appropriate in determining a value. These valuation reports typically include research on the subject company's industry, economic conditions, trends, etc.

Fairness opinions provide the expert's opinion of whether the proposed value of the transaction is "fair" for the shareholders. Fairness opinions do not typically provide an estimate of value or value range.

5. What are the main credentialing bodies for business valuation, what designations do they offer, and what designations have you earned?

The four main credentialing bodies in the business valuation profession are the National Association of Certified Valuation Analysts (NACVA), the Institute of Business Appraisers (IBA), the American Society of Appraisers (ASA), and the American Institute of Certified Public Accountants (AICPA).

NACVA offers the Certified Valuation Analyst (CVA) designation (for Certified Public Accountants only) and the Accredited Valuation Analyst (AVA) designation.

The IBA offers the Master Certified Business Appraiser (MCBA), the Certified Business Appraisers (CBA), Accredited by IBA (AIBA), Business Valuator Accredited for Litigation (BVAL), and Accredited in Business Appraisal Review (ABAR) designations.

The ASA offers the Accredited Member (AM), the Accredited Senior Appraiser (ASA), and the Fellow Accredited Senior Appraiser (FASA).

The AICPA offers the Accredited in Business Valuation (ABV) designation.


6. Why should a business have an annual valuation?

The most common benefits of an annual business valuation policy include:

Accountability and Performance-An annual business valuation enables the shareholders to see the value that is being consistently created or destroyed by the management of the firm.

Estate Planning Purposes-Many shareholders have on-going estate planning strategies aimed at protecting wealth for heirs.

Buy-sell situations-For those firms that do not have buy-sell agreements in place, annual business valuations are a good way of avoiding disputes that may arise when a shareholder seeks to sell his shares to the other shareholders.

Facilitate Banking-Many firms effectively utilize leverage to invest in value-creating projects. The ability of a firm to borrow based on the value of the goodwill or the value of the company's shares may expand the universe of value-creating investment options available.

Expands the Investment Options-Closely held firms suffer from a lack of liquidity and the inability to use the company's shares as currency when seeking acquisitions. An annual business valuation may enable the management of the company to use the shares as acquisition currency.

7. What is the difference between enterprise value and equity value?

Enterprise value is often referred to as the value of the invested capital of the business which includes the value of the equity and the value of the firm's liabilities. This value represents the total funding of the asset side of the balance sheet for all fixed assets, cash, receivables, inventory, and the goodwill of the business. Equity Value is the enterprise value less all liabilities of the business and represents the value that has accrued to the shareholders through retained earnings, etc.

As various professionals may define these levels of value differently, it is important to understand exactly what a definition of a level of value includes or excludes under the specific circumstances.

8. Do you use rules of thumb when valuing the business?

Rules of thumb are simple pricing techniques that business brokers typically use to approximate the market value of a business. Rules of thumb typically come in the form of a percentage of revenues or a multiple of a level of earnings, such as seller's discretionary cash flow. For example, a rule of thumb for pricing a widget manufacturer may be 40% of annual revenues plus inventory or two times seller's discretionary earnings. Rules of thumb fail to consider the specific characteristics of a company as compared to the industry or other similar companies. In addition, rules of thumb do not reflect changes in economic, industry, or competitive factors over time.

Widely-accepted business appraisal theory and practice does not include specific methodology for rules of thumb in developing a value estimate. However, rules of thumb can be useful in testing the value conclusion arrived through the appraiser's selected approaches and methods.

9. What role do court rulings have in developing an indication of value?

While Tax Court rulings may reflect the proclivity of certain courts to accept various discounts or levels of discounts in case-specific circumstances, these rulings may or may not play a role in the business appraiser's analysis and value conclusion. The business appraiser must consider the relevant facts in the subject valuation and make a reasoned, informed decision regarding the discounts and level of discounts in developing an indication of value.

With respect to case law, business appraisers should be aware of general issues that may impact a valuation. Often times, the business appraiser consults the client's legal counsel for their position on specific case law issues. Again, the business appraiser must use reasoned, informed judgment in developing an indication of value, considering the case-specific facts relevant to the valuation.

10. What are the main factors that impact the value of a business?

The value of a business interest is impacted by a number of factors, many of which may change from year to year, including:

• Financial performance-If a business has poor earnings capacity, the value of the business imay be negatively impacted.

• Growth prospects-Just as too high a rate of growth may lead to negative operational and financial consequences, too low a growth rate may also have a negative impact upon the business and its ability to achieve profitability. Revenue growth drives all opportunities for the business to expand.

• Competitive nature of industry-If the industry in which the business is operating has become more competitive due to the entrance of new competitors, the value of a business may be impacted as a result of lost market share, lower revenue growth, shrinking margins, and lower profitability.

• Management-Management of a business influences the value of the firm. A highly experienced management team and an organization with managerial depth is more highly valued by a willing buyer than an organization with only one manager or key executive.

• Economic and industry condition-The strength of the economy impacts all businesses in one way or another. If adverse economic conditions translate into long-term lower growth and profitability for a business, the value may be negatively impacted. Industry conditions are also impacted by the state of the economy but are also influenced by various other factors such as competition, technological change, trends, etc.

Article Source: http://www.articlesbase.com/finance-articles/top-ten-business-valuation-questions-for-business-appraisers-387742.html

About the AuthorRobert M. Clinger III has strong experience in the fields of business valuation and financial analysis, having earned the Accredited Valuation Analyst (AVA) designation from the NACVA and the Certified Business Appraiser (CBA) from the Institute of Business Appraisers. More information on business valuations/appraisals may be obtained by visiting Highland Global’s website http://www.HighlandGlobal.com.

Business Valuation: When Would You Need the Service?

Author: Nasreen Haque

The most common occurrence that would give rise to the need for a business valuation professional is the sale or transfer of one's business. Those who are contemplating a sale, as well as those interested in purchasing a going concern, each alike, can benefit greatly from the services of a business valuation professional.

Many businesses may not understand — or appreciate — that the true “value” of an enterprise is comprised of many different and varied components requiring sophisticated financial analyses. As a business owner, how would you determine a price for the sale of your business? Would your computation be limited solely to a review of the gross receipts from your most profitable year?

For purposes of establishing a sales price, how will the present value of any lease payments be determined? What is the proper method for appraising any real estate owned — property tax assessment or comparable worth? Should accounts receivables be discounted due to aging?

Just because an asset may be intangible doesn't necessarily mean it has no "value" for purposes of a sale or transfer of your business. Would you know enough to assign a value to your business’s goodwill? How about the value of your customer lists, which have taken you years to develop?

These questions illustrate the need for professionals who have the expertise to address each of these important elements and help insure that all components that constitute an enterprise’s worth are not overlooked and are properly factored into a determination of its value.

Additionally, business valuation companies can ably assist with the often times cumbersome valuation of a company’s intellectual property: patents, royalty or license payments and any registered trademarks or copyrights.

Given their proficiency in utilizing sophisticated financial modeling techniques and performing discounted cash flow analyses, business valuation companies specialize in making just such determinations that are based on a range of factors that insure that the value assigned to a business is truly reflective of its intrinsic worth.

Another common situation for which the services of a business valuation firm will prove indispensable is ascertaining the value of shares for private companies whose stock is not publicly traded. Problems of valuation arise for stock transfer restrictions or rights of first refusal, as well as buy-outs or attempts to squeeze-out minority shareholders.

Shareholders of closely held corporations would be wise to agree in advance to jointly name a business valuation service that would conduct a fair share price valuation. This would help eliminate valuations that are speculative or grossly inequitable, and would help avoid costly and time-consuming litigation resulting from shareholder disputes. By virtue of their expertise in these matters, courts frequently rely on business valuation firms to assist them in making these complex appraisal determinations.

Not surprisingly, few if any, individuals have the accounting background, the sophisticated financial modeling expertise, and the knowledge of accepted valuation methodologies, to perform these tasks competently by themselves. As such, they would be well advised to enlist the services of a business valuations professional. Bottom of Form

Article Source: http://www.articlesbase.com/wealth-building-articles/business-valuation-when-would-you-need-the-service-1269715.html

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