How Much is My Business Worth?
How much is my business worth? Everybody loves asking the question. Not to be a downer on the question, but the real answer is whatever somebody is willing to pay. If you can’t find a buyer for your business at the $5MM valuation number you came up with, it’s not worth that price.
But let’s discuss the theoretical valuation question if you want to understand how a private equity firm or a larger corporation would value your company.
Focusing on purely just the financial analysis, removing any potential synergistic value that would have to be determined on a case-by-case basis for your specific business and the potential buyer, a valuation could be determined by looking at three different methods.
1. Precedent Transactions
Simply, what are other companies selling for in my space? The two common metrics to look at are Enterprise Value / EBITDA and Enterprise Value / Revenue at the time of the sale, with the former being the most common multiple. This means that if I can determine what the sale price was and what the current financial metrics of similar companies were when they sold, then I can determine a range of multiples.
For example, if I have a car wash company and there are other car washes in my area selling between a 6 or 7 times multiplier on EBITDA, I could infer that if I tried to sell my car wash, I could get a similar value. I would take my current annual EBITDA and apply a similar multiplier to determine a sale price.
2. Public Comparable Companies
What are the public companies in my space trading at? Similar to precedent transactions, the two most common metrics to look for are Enterprise Value / EBITDA and Enterprise Value / Sales. The one nuance is that unlike precedent transactions which are at the specific time the sale occurred, you can look where public companies are trading both on a historical performance (last year or the last twelve months) and forward-looking (future year projections).
For example, if I have a car wash company, I would look to see if there are any public companies that own and operate car washes like mine. I would try to find at least 3 of them and see where those companies are trading. From the data set, I would take either the mean or median of the multiples to determine a multiplier that I could apply to my business metrics. Note that public companies get a premium for being public, since they are generally a liquid investment, and often the private markets would trade at a discount.
3. Discounted Cash Flow Analysis
Unlike the first two methods, which are relative, a discounted cash flow (DCF) analysis is an intrinsic valuation that takes into account the company’s cash flows and the required rate of return. A DCF takes the expected return, and the resulting value is how much you would be willing to pay for something to receive exactly that rate of return.
Once all three of these analyses are completed, then you can determine how much your business is worth.
If you are interested in learning more about selling your business, I cover other topics here in more detail:
- How Do I Sell My Business?
- How Much Does it Cost to Sell My Business?
- What Do I Need to Prepare to Sell My Business?
- When Should I Sell My Business?
