Help with value of business?

[coryjsmith18]

Hello everybody.

Does anybody have experience or preference with a valuation tool that can help me understand what a business is worth?

Thanks.

 

[Meadbh]

Here's one tool:

globeandmail.com : Small Business

But this is a complex process that you can hire professional consultants to do.

Disclaimer: I have not had occasion to do business valuation.

 

[Debinnov a]

What type of business? Usually the value is a multiple based on either the yearly profit or revenues. But there are so many different components. I just went through this getting ready for a sale.

 

[ChicagoCPA]

DCF

 

[flotsamandjetsam]

Buying or selling? Majority or minority interest? Profitable? There are many aspects to consider.

 

[pb4uski]

Typically a business would be valued using discounted cash flows. Taking the projected distributions from the business (profits that can be distributed to the owner) and discounting them at a rate of return commensurate with the riskiness of the cash flows.

It get more complicated from there but that is a place to start.

 

[Bored Beyond Belief]

As others have said, there are many different ways to value a business. I have a good article about it at the office that I will try to remember to post a link tomorrow. If I forget, feel free to send me a PM.

An important consideration is the discount rate that you use. In general, the riskier the business the greater the discount. For example, personal service companies will have a greater discount (unless you are "the person") then an established distributorship with exclusive control of a market area which might have a low discount rate.

 

[Kabekew]

Does anybody have experience or preference with a valuation tool that can help me understand what a business is worth?

From my research and experience, business valuation is a specialty and a bit of an art. If it's a mature business that is done growing, the buyer may be interested primarily in the income and will be thinking some multiple of net income (say, 1-3x). If there's growth potential, maybe more.

If it's a product business, they'll be looking at the cost to bring a similar product to market themselves, plus the cost of having to compete with you and being that much late to market. My company was a product company (software and custom hardware) and when negotiating a price I pointed out it based on what I put into the project, it would probably cost them $2 million to try to recreate it themselves (based on industry wages and costs to hire subject matter experts, project managers, etc) and they quickly agreed with that. Plus, it would take them some time and lost opportunities before they could sell it, plus there was a risk of project failure. What are those intangibles worth to a buyer? We agreed on a little below $4 million which I found out later (because I went to work for them during the transition) was what they had valued it at too. They didn't care at all about my revenue, because they were a lot larger and could get it into much larger markets.

So yea, it depends.

 

[coryjsmith18]

I am looking for an online valuation service that could produce a ballpark estimate. A little more extensive than what meadh shared - it doesn't have to be free. Does anybody have any experiences with tools like these (but more extensive)?