Wednesday, June 29, 2011

What's My Business Worth?

There's an old saying among business brokers and firms that handle mergers and acquisitions:   
"You never want to be the first person who tells someone what his business is really worth"
Many business owners, including some Chief Executive Boards International members, have fanciful ideas about what someone might pay for their business. 

Here's a great article that lays out some realisic valuation parameters for several different kinds of businesses.    Note that all of them center around Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA).   That's calculated by taking your Net Income and adding back those items.   In the case of S-corps and LLCs, of course, you don't have taxes on your company's income statement.  

Actually, what buyers want to pay for is Net Cash Flow -- how much money will I be able to extract annually from this company if I own it?  At that point, it's purely a Return on Investment calculation -- an investment "interest rate", if you will.  A Net Cash Flow calculation would add/deduct from EBITDA to adjust for capital investment (uses cash) and changes in working capital (inventory, accounts payable, accounts receivable).  Hence "Cash is King" applies not only operationally, but in driving long-term company value, as well. 

The "multiples" referred to are actually the inverse of rates of return.  Think of buying a little "money machine" and paying a multiple of how much money it spits out each year.  The more you pay, the lower your rate of return per year.   Here's how that works:

Multiple of
Annual Free Cash Flow (purchase price)
ROI% (Annual
rate of return)

We hope this overview and the link above will be useful information in answering the question, "What's my business really worth?"  

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Terry Weaver

Chief Executive Boards International

Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it 

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