Business Valuations

Many factors are considered when arriving at the market value of a business. The market itself is the final determines the value. Theoretically, a businesses value is determined by evaluating the assets to be sold and the potential income those assets have and will generate for the potential buyer. Contact us today for more detail information as it relates directly to your industry.

Most businesses are sold as “asset sales” versus stock transfers. (Asset sales offer much less risk for a buyer, as any “hidden” liabilities are the responsibility of the seller.) Consequently business owners will probably retain certain assets and may pay certain bills and the company’s financial information must be adjusted for these items. Typical examples of assets retained are cash in the bank, vehicles, life insurance policies, etc. Additionally, in order to properly value a business the company’s financial reports for tax purposes must be adjusted to reflect the true financial performance of the business. Tax charges such as excess depreciation or charges for “extra” company vehicles must be added back to taxable income. These are just a few of the adjustments and considerations taken into account in order to value a business.

Once these adjustments have been taken into account generally there are two ways to arrive at the value of a small business. One method uses the company’s ability to generate sales, cash flow and/or profits. The second method is to value the company based on its assets. The method used depends on the condition of the business and the industry it is in. However, a business, like any other asset, is worth what a buyer is willing to pay and what an owner is willing to accept. KNZ Business Brokers are qualified to advise you on the value of your business.

Rule of Thumb Valuation Guidelines.*

An extremely well established and steady business with a rock-solid market position whose continued earnings will not be dependent upon a strong management team.
A multiple of eight to ten times current profits
An established business with a good market position, with some competitive pressures and some swings in earnings, requiring continual management attention.
A multiple of five to seven times current profits
An established business with no significant competitive advantages, stiff competition, few hard assets, and heavy dependency upon management’s skills for success.
A multiple of two to four times current profits
A small personal service business where the new owner will be the only, or one of the only, professional service providers.
A multiple of one times current profits