Business Valuation Calculator
Use this form to Value your Business to the current year
It is important to realize that the majority of small and medium-sized businesses do not sell. It is estimated only between 5 to 15% of listed businesses are sold. A sale can take between 9 to 15 months at best.
Does your business show growth and profitability? If the business does not show good cash flow and profitability, it becomes difficult to attract a suitable and potential buyer. Most cases vendors do not provide adequate financial information and the necessary documentation promptly.
Documents such as income statements, salary and compensations drawn by the owners (SDE), tax reports and leases are the very minimum need to be provided. The information also needs to be verifiable. Buyers look at the revenue model of the business. Are there contracts in place, recurring revenue and steady growth of sales?
If you have one customer represents over 30 per cent of the revenue, then this would be considered a major risk to the potential buyer.
where the business has been poorly promoted for sale and to the wrong target market, then it is very unlikely to bring in suitable buyers. There is a need to keep your business name confidential, until the final sale. You do not want your suppliers, customers and employees to be upset with the impending change in the management of the business.
Advertising needs to be discrete yet spread far and wide to reach the potential suitable buyers. If this is not happening then the marketing plan is not working.
most businesses in the small business space are owner-operated. This means the owner is the business and once the owner leaves, there is no business. The owner needs not to be involved in the day to day running of the business. There is less value to an owner-operated business.
If the business runs with the owner at an arm’s length, and the staff runs it with little supervision and oversight from the owner, there will be of greater value to the buyer. With unusually high staff turnover and low salaries, is an indication that the business is not going well.
the poor siting of the business, and little foot traffic is a sure sign the potential to increase customers and growth is very unlikely for the new owner. As the saying goes, it is location, location, location, that would make the business attractive.
unfortunately, most owners decide to put the business on the market when the business is spiraling down and drop in profitability. Having a written sale plan and documentation about the business will give potential buyer confidence about the business. Being aware of the market place and being in contact with advisors, bankers will be useful in deciding the best time to put the business on the market.
finding a suitable buyer is very often the most difficult task. There are lots of potentials buyers, who are simply playing the rounds. Planning and talking to consultants, your accountant, bank and network teams are more likely to draw suitable buyers who are looking at your location, business suitability and economic conditions to fit in with their objectives.
Valuation and expectations
the biggest reason for the non-sale of a business is due to unrealistic value expectations by the vendors. If the asking price is too high and unjustified potential buyers will not even look at the business.
Though owners need to be compensated for all the hard work, long hours and funding invested in the business, however, the asking price needs to be realistic to market conditions. The buyers would be willing to pay the market value; if the value that is realistic with verifiable information and to industry performance standards.
If the buyer can be shown the history and projections of growth, then the multiple based on EBITDA or SDE can be higher. Where the asking price is too low, then there is the suspicion that there is something wrong with the business that has not been disclosed.
Note to bear in mind, any valuation is theoretical. It is used as a guide to an expected value. In the open market, it is a willing buyer, willing seller situation.
- What is it worth to the buyer?
- Is the buyer prepared to pay that value?
- Ask yourself, that as you are an expert in your business, realistically would you be prepared to pay that asking price?