What Determines How Much a Business Is Worth?

In My Humble Opinion
1

Let’s say I own and run HeyHomie’s Widget Distribution Co. I don’t have any shareholders; all the profits go to me. But I want to get out of the game and retire to a nice beach in the Caribbean, so I sell my business.

What is the general starting point for the sale of a business? Annual net profits * some number of years, perhaps, plus the value of all real estate and equipment?

2

There are several approaches. The three top approaches are probably “the income approach, the cost approach and the market (comparable sales) approach.” Business Valuation - Discounted Cash Flow Calculator

http://www.score.org/article_business_valuation_101.html

There are also many business valuation rules of thumb: http://www.bizbuysell.com/guide/b_value_1.htm

3

I don’t have the time to review **Gfactor’s **links, but suspect they provide a lot of info.

The short answer that I deal with in valuing companies and doing deals - something that is part of my job - is to adjust a company’s income statement to focus on the profits actually generated by the business. This is typically referred to as EBITDA - Earnings Before Income Tax, Depreciation and Amortization.

Once you have the “real” annual profits of the business, you research that sector to understand what the typical “valuation multiple” is for that category of business. Some lower profit category companies may be bought or sold for 2 - 3x EBITDA. Others are typically valued and moved at over 15x EBITDA.

If the company is a start-up and not generating EBITDA, well, it’s a completely 'nother matter. Lots of fishiness, best left to Venture Capitalists…

4

Once you have the “real” annual profits of the business, you research that sector to understand what the typical “valuation multiple” is for that category of business. Some lower profit category companies may be bought or sold for 2 - 3x EBITDA. Others are typically valued and moved at over 15x EBITDA.

for what multiples do manufacturing companies sell ? ( lets us take annual sales of USD 1 million)Assuming they do have an edge over competitors and great potential for futre expansion over a 10 year horizon.

Looking for a ballpark figure .

5

1.5x(Net Profit)+Assets=Selling Price is a good place to start.

6

I’m sorry, I am not sure - there are industry analysts, research of prior deals to understand comparable rates, etc. - they vary widely by industry sector and I have no experience in that area. I suspect that you should be able to do research on government websites that list mergers - find ones that occurred in your targeted sector and see how much they sold for, then do the math based on their EBITDA…all of which implies you have a degree of Business Development expertise or can find someone who does…

7

I was thinking something along the lines of this. Didn’t know what multiple to use on profit though. Shouldn’t it be “Net Assets” rather than “Assets”?