ValuAdder Business Valuation Blog

For a mature industry, commercial printing shows surprisingly low consolidation. There are, for example, some 31,750 lithographic printing establishments in the US alone. This printing industry segment generates an impressive $45B in annual sales and employs nearly 345,000.

Yet an average commercial printer is a small business - making $1,500,000 in annual revenues and employing 11 staff. Commercial lithographic printers with fewer than 25 employees account for 92% of the total businesses in their segment and generate over $16B in sales. Small owner-operator managed printing shops thrive alongside the much larger competitors!

What makes a commercial printing business worth more

No two printing businesses are the same. For a small printing operator, finding a profitable, defensible niche is very important. A number of factors can make your business worth more:

• Business size. Larger commercial printers tend to be more valuable.
• Profitability. Valuable printing companies tend to have operating profits topping 10 - 15%.
• Industry segment. Lithographic printing businesses are the largest segment with good growth prospects. Another valuable industry segment is digital printing.
• Low customer concentration. To maximize your business value, your top 5 customers should not exceed 10% of total revenues.

What valuation multiples are used to value printing businesses

Established commercial printers are frequent business acquisition targets. You can use the selling prices of similar printing businesses to come up with a number of valuation multiples to estimate your business fair market value.

Our analysis of the private printing business sales shows that the following valuation multiples provide the most accurate business value estimates in this industry:

1. Business selling price to gross sales plus inventory.
2. Business selling price to seller’s discretionary cash flow plus inventory.
3. Selling price to annual EBITDA. Again inventory is extra.

The EBITDA based valuation multiples tend to give you the business value estimate with a higher spread between the low and high values. One reason for this is that the available cash flow in a commercial printing company is affected by the capital expenditures, such as new equipment purchases. While EBITDA includes the depreciation charge, it does not account for the annual ”capex” outlay directly.

Generally, the higher your business EBITDA and the lower the capital expenses, the higher the EBITDA based multiple. This is especially true for commercial printers grossing over $2M in revenues.

Valuing a Business: Market Comps

Other business valuation methods for commercial printing businesses

As with other small businesses, commercial printers can be valued using a number of income and asset based business valuation methods. For owner-operator managed printers, the Multiple of Discretionary Earnings method is a frequent choice. This well-known method lets you determine the value of your business based on its earnings and a set of financial and operational performance factors.

For a well-established commercial printing business, the Capitalized Excess Earnings method is a good choice. You can calculate the value of your business and its goodwill - an important part of what makes a successful business worth more.

If you are looking to sell to a larger competitor, a group of investors, or need a very accurate, defensible business appraisal, consider using the Discounted Cash Flow method. You can determine what your business is worth directly from its earnings forecast and risk assessment.

Retail bakery industry - top statistics

The bakery industry has deep roots in the economy with a number of established players. In the US alone, there are some 9,600 bakeries classified under SIC 5149 that generate just under $28B in annual revenues.

While the market is dominated by a few big competitors with the top 5 responsible for almost 50% of the total sales volume; some 7,000 small, privately owned bakeries compete successfully.

Large bakeries may employ over 100 employees and do some $50M in business each year. Yet a typical retail baker is a small business with just one location, an average staff of 11, and $5,500,000 in annual revenues.

Business value drivers for a retail bakery

To be successful and increase their business value, bakery owners pay special attention to a number of key factors:

• Equipment. Good automation helps reduce direct costs including labor. However, new equipment can be very expensive, which deters new competitors.
• Labor costs. Bakers often work during early hours. This tends to increase labor costs due to small available labor pool and higher health insurance costs.
• Product differentiation. A growing trend is toward production of specialty baked goods such as artisan breads, and products for the health conscious consumer. Small bakers can excel in this market place which tends to be less price sensitive.
• Cost-effective materials procurement. Successful bakers manage their material costs to within 20% of gross sales.
• Effective distribution. Making your products available on time through the right outlets to the target market is essential for success.

Valuation multiples that work best for valuing a bakery business

Many small bakeries are family owned with business ownership passing from one generation to the next. Nevertheless, bakeries do sell so there are business sale comparables you can use to estimate the market value of these businesses.

Typical valuation multiples used to assess the value of a small bakery are these:

1. Business selling price to gross revenues plus inventory.
2. Business selling price to seller’s discretionary cash flow. Again, the inventory is extra.

We offer Business Market Value reports to our clients in all industries, including private bakeries. To provide the most accurate estimate of business value possible, we analyze a number of valuation multiples based on business revenues, gross and net profits, EBITDA, cash flow and assets values.

Business Market Values across 700 Industries

Valuation multiples with the smallest spread offer reliable business value estimates

While you can use any number of valuation multiples to estimate the potential business selling price or market value, the best estimates come from the valuation multiples that tend to “cluster” around the average value.

What this means is that business owners and buyers in your industry rely on these valuation multiples more often when pricing a deal. Since the market is seen by many as the ultimate arbiter of business value, you should pay attention to these valuation multiples when calculating your business worth.

Other business valuation methods for bakery appraisal

For family owned and run bakery businesses, the Multiple of Discretionary Cash Flow method is the most common way to assess business value. The power of this income-based business valuation method is in its ability to account for a number of key financial and operational business performance factors that affect directly what the business is  worth.

Business Valuation: Multiple of Earnings

For larger, multi-site bakeries, the Discounted Cash Flow business valuation method is the preferred choice. This well known method lets you treat bakery valuation as an investment project, factoring in the business earnings and risk in your calculations.

Valuing a Business: Cash Flow and Risk

To get an accurate, defensible bakery appraisal, your business valuation model should include a number of different methods.

Given the current situation in the real estate market, there is an uptick in real estate agency valuations. Many brokerage owners want to know what the agency is worth should they decide to put the business up for sale.

When it comes to valuing a business in this industry, real estate brokerages are quite similar to professional practices:

• Hard asset base is relatively low.
• Revenue generation depends upon the skill of professional real estate agents.
• Business goodwill, especially for established agencies, is very important. At least a part of business goodwill is personal in nature, which may complicate its transfer to the new business ownership.
• Licensing requirements create a barrier to entry, reducing the available pool of business buyers.

Business valation approaches and methods

A real estate brokerage can be valued under all three standard approaches to business valuation:

1. Market - based on comparison to similar real estate business sales.
2. Income - factoring in the real estate agency earnings prospects and risk.
3. Asset - by accounting for the values of the real estate agency assets and liabilities.

Asset-based business valuation methods are less common in valuing a real estate agency. The hard assets are typically concentrated in the office furniture and fixtures, computer equipment and productivity software tools. Their market values can be easily determined. However, valuing the business intangible assets, such as client lists, is far more difficult.

One asset-based business valuation  method that is useful for valuing a real estate brokerage is Capitalized Excess Earnings. This well-established business appraisal technique lets you calculate the value of business goodwill based on the so-called excess earnings - those over and above a fair return on the business tangible assets.

Business valuation using market comps

Market data on real estate agency sales is a frequent source of comparables. Just as in the real estate sales, market comps offer a way to estimate the fair market value of a real estate brokerage.

Typical business valuation multiples for real estate agencies

The most reliable valuation multiples are:

• Business sale price to gross revenues.
• Business sale price to seller’s discretionary cash flow.

Valuation Multiples and Business Market Values

At ValuAdder, we analyze recent private business sales and compile business market value reports for clients in all types of industries. To offer you an accurate business market value estimate, we calculate over 40 valuation multiples - relating the business selling price to its revenues, profits, EBITDA, EBIT, cash flow, and assets, among other measures.

This statistical analysis shows that accuracy of business valuation multiples varies by:

1. Industry.
2. Company size.
3. Over time.
4. Selected measure of business financial performance.

The best valuation multiples tend to give you business sale price estimates with low variation that tend to cluster tightly around the average.

This basically means that business buyers and sellers rely on these valuation multiples when pricing a business for sale in your industry.

Valuation of real estate agencies on income

Business values of established and young real estate agencies are very often determined using the income-based business appraisal methods.

For mid-market real estate brokerages, the discounted cash flow is the preferred valuation method. For smaller, owner-operator managed agencies, the multiple of discretionary earnings method offers a great way to directly capitalize the business value.

Business selling price and market value

Your business valuation number does not necessarily equate to the business selling price. When offering a real estate business for sale, both price and terms affect the “cash value” of the deal.

Just as with other types of professional practices, an earnout is a frequent element of the deal. This makes part of the contract business selling price contingent upon its future financial performance, such as achievement of a certain level of sales.

Privately owned specialty coffee shops are ubiquitous and their number is constantly growing.

In the US alone, there are some 19,000 privately operated coffee shops. They generate over $11.1B in total annual sales. Yet an average coffee shop is definitely small business - with annual revenues of $1,500,000 and a staff of just 9 people.

Coffee shops can be very profitable, recession proof businesses. A well-run business focuses on its local target market, satisfies the tastes and offers the unique atmosphere to develop a loyal customer following.

Successful franchises have come forward by capitalizing on the “affordable luxury” appeal of specialty coffee drinks and the ambiance that draws the customers in.

Business value drivers for coffee shops

While starting a coffee shop is relatively easy, running a successful business is more challenging. Here are the top factors that affect what your business is worth:

1. Location. Coffee shops are gathering places, so the best location is where your target customers like to get together.
2. Quality and variety of coffee drinks offered.
3. Cost of goods including the wholesale coffee costs.
4. Competitive differentiation, such as additional on-premises food and beverage offerings, retail coffee and tea sales.

Business valuation techniques for coffee shops

Coffee shops sell quite often, so you can estimate your business market value using valuation multiples based on private coffee shop sales. The most accurate valuation  multiples are:

• Business selling price based on its revenue plus inventory.
• Business selling price based on the annual discretionary cash flow plus inventory.

Valuation Multiples and Business Selling Prices

Many small coffee shops are owner-operator managed. For such an operation, the Multiple of Discretionary Earnings business valuation method is a great choice.

You can determine what your coffee shop is worth based on its earnings and a number of key financial and operational performance factors. What’s more, you can also see how these factors affect your business value - and what you can do to increase your business worth.

Heating, ventilation and air conditioning as well as plumbing contractors make up a very large industry with over $121 billion in annual gross revenues.

The industry is still highly fragmented with some 178,550 independent business competing across the US alone.

The average business in this industry, classified under SIC 1711, is privately owned and small - with $700,000 in annual revenues on average, employing 6 full time equivalent staff.

Factors that drive company valuations

Successful HVAC and plumbing contractors tend to focus on the service they provide to their target market. Differentiation is key to profitability and business owners must make key decisions on what service mix to offer to their commercial or residential clients.

Location of the busines premises is not as critical as say, for retail stores, because HVAC and plumbing contractors travel to their customer sites. However, local offline and online advertising visibility is very important for new business, as are referrals from your existing customers.

HVAC and plumbing contractors need to generate steady repeat business to smooth out income fluctuations. Ongoing service and maintenance contracts can be extremely useful for sustainable profitability.

Being flexible and in tune with emerging market trends is the hallmark of successful contractor businesses in this industry. Your profits, and company value, depend strongly on how well the service mix fits in with the current market needs.

Business valuation methods for HVAC and plumbing contractors

HVAC and plumbing contractors sell often, so there are private business sale comps you can use to come up with accurate valuation multiples in this industry.

The typical valuation multiples for these companies are:

1. Price to annual revenue, plus inventory.
2. Price to SDCF, plus inventory.

Valuation Multiples by Industry

Why these valuation multiples?

We prepare Business Market Value reports for customers and analyze the private business sale comps in many industries. To select the best valuation multiples for a business, we look at the business selling price spread, low to high, in comparison to the average selling prices. In math terms, we look for the valuation multiple with the lowest coefficient of variation.

You can estimate your business selling price more accurately using the valuation multiples that show the relatively low variation around the average selling price.

Because most business buyers and sellers use them

What this means is that business buyers and sellers in your industry tend to rely on these valuation multiples more often to price their deals.

To get reliable estimates of business market value

Using such valuation multiples, you can come up with an accurate estimate of what your business is worth on the market.

Business valuation based on income and risk

For business appraisals of owner-operator managed businesses, you can use the Multiple of Discretionary Earnings business valuation method.

The method lets you calculate what your business is worth based on its earnings and 14 important financial and performance factors.

What is your business goodwill worth?

For well-established HVAC and plumbing contractors that have been around for a number of years, the question of business goodwill is important.

You can use the well-known Capitalized Excess Earnings business valuation method to determine the value of business goodwill - an important part of the total business value.

If you own a coin laundry or plan to purchase a laundromat business, you are in good company: there are over 16,700 such businesses in the US alone. The annual revenues for the industry as a whole are just under $2.2B. Yet the average coin laundry is a typical small business: it employs 3 people and grosses around $100,000 a year.

What creates business value in a laundromat

Coin laundries are cash businesses which are prized for their ability to generate steady income and show considerable resistance to recession. It is relatively easy to find a profitable niche in this industry and most laundromat owners experience only moderate levels of competition.

If you study coin laundry sales data, you will no doubt spot a number of factors that contribute to a laundromat business value - and higher selling price:

• Stability of historic business earnings.
• Location. Customer access, exclusivity arrangements and presence of a reliable anchor nearby are very important.
• Rental expense within 10 - 20% of gross revenues.
• Labor expenses within the industry norm of 10% of gross revenues.
• Condition of equipment.
• Additional value added services, such as an on-premises mart, game and video rentals.

Business valuation methods for coin laundries

Laundromats are a frequent acquisition target. So there is plenty of comparable business sales data to price your business. Typical valuation multiples for coin laundries are based on the discretionary cash flow, plus inventory. These businesses are also priced using  the multiples of gross sales. Again, the value of inventory is extra.

You can use ValuAdder business valuation Rules of Thumb to price a laundromat. Just provide the basic financial inputs about your business. Within seconds, ValuAdder shows you the business value range, median and average values.

Since coin laundry ownership is about cash flow, income-based business valuation is often used to price such businesses. For small shops, the Multiple of Discretionary Earnings business valuation method is a common choice. This method lets you determine the coin laundry business value based on the income and 14 essential financial and operational performance factors.

The Discounted Cash Flow business valuation method lets you determine the laundromat value based on the business income and risk. Since these businesses have a decent resale value, you can account for it directly in your Discounted Cash Flow business valuation.

With increasing numbers of the baby boomers reaching retirement age, there is one skilled services sector that is sure to flourish - home health care.

Indeed, home health care services, classified under SIC code 8082, have been experiencing rapid growth recently. There are excellent opportunities for differentiation since a business can specialize in providing services to a targeted demographic.

With excellent earnings upside, low capital asset investment requirements, and net profit margins that can exceed 20% of revenue, mid-market home healthcare businesses are in high demand. Smaller companies need to focus on growth to reach the critical mass and establish themselves as the dominant presence in their market.

Risk factors that affect business value

While the industry prospects are good, there are some challenges that impact what a home health care business is worth:

• Intensity of competition from new market entrants.
• Exposure to litigation.
• Difficulty in attracting and retaining qualified staff.

In addition, as the industry matures, consolidation pressures may force smaller operators to merge or be acquired by larger firms.

Business valuation methods for home health care companies

As many service businesses, the typical home health care firm has a relatively low asset base. Thus, business valuation focuses on assessment of the business earning capacity and risk.  You can choose a number of income-based business valuation methods to value your company.

For smaller, owner-operator managed businesses, Multiple of Discretionary Earnings method provides a great way to appraise a business based on its earnings and 14 key financial and operational performance and risk factors.

For businesses looking to expand rapidly, Discounted Cash Flow is a proven way to determine the business value based directly on the projected income stream.

Valuation of a Business as Multiple of its Earnings

Don’t forget to check the market place for actual selling prices and valuation multiples - especially if you plan to sell or buy a home health care business.

Typical valuation multiples for the companies in this service sector are:

1. Based on gross revenues.
2. Based on discretionary cash flow.

The value of inventory is added to the estimate you get using either valuation multiple. Since home health care businesses sell often, there is plenty of  market data to compare against - and make a fact-based decision on your asking price or purchase offer terms.

Calculate business value by direct market comparison

One way to do such market-based business valuation is to use ValuAdder Rules of Thumb. ValuAdder provides coverage for over 400 industries, including home health care businesses.

You can calculate your business value based on the actual sales of similar businesses in this service sector. All you need to provide is the business revenues and inventory - ValuAdder calculates the business value range, average and median values instantly!

Business Valuation using Market Comparison

Auto tire retail stores, classified under SIC code 5531, represent around 19,000 establishments in the US alone. Over two thirds of these businesses are small, owner-run single store operations.

Check these interesting facts: while the industry as a whole generates over $77bn in revenues, the average store makes around $1,500,000 in annual gross sales, employing just 7 employees.

A well-run store offers around 6 - 12 brands of tires, with commercial dealers carrying as few as four or five. Big brand tire products are a major plus since they tend to attract repeat business from brand-loyal customers. As a result, a store which offers the right mix of top brand name products in its market tends to command valuation multiples that are 15 - 20% higher than its competitors.

Key factors that affect an auto tire store business valuation

When it comes to valuing a business or setting its selling price, not all auto tire stores are created equal. You need to consider the factors that drive business value in this industry. Here are the top ones:

1. Location
2. Established, loyal customer base
3. Availability of trained employees and strong store management, beside the owners
4. Terms of lease
5. Condition and quality of store equipment
6. Percentage of sales derived from product sales and service.

For many stores, service offerings tend to be more profitable than tire sales. In times of rapidly increasing oil prices, tire product costs tend to crimp product profit margins. Service revenues on the order of 50% of the total typically indicate a store with excellent profit potential. The result is higher business valuation and, very likely, a higher business selling price.

Business valuation methods for auto tire stores

Auto tire stores sell often, so there is plenty of business sales to compare your selling price and terms against. Such business market value comparisons can give you very accurate and compelling results. Typical valuation multiples are based on the business discretionary cash flow plus inventory levels at replacement cost.

Valuing a Business using Market Comps

Another excellent way to value a business in this industry is to use the time-tested Multiple of Discretionary Earnings valuation method. In addition to the business earnings, this business valuation methods lets you account for all the key value factors above.

Using this business valuation technique, you can determine what the business is worth today, then see what can be done to increase business value - before making critical decisions such as offering the business for sale or bringing a partner on board.

Business Valuation based on Multiple of its Earnings

If you own a car wash business or looking to buy one, here is a piece of good news: car washes are one of the most profitable sectors of the service industry with above average profits. These businesses are known to generate steady income due to the necessary and recurring nature of the service they offer.

While changes in car designs and energy alternatives may have lasting effect on many auto service businesses, the car wash will continue to provide the same basic service. This, of course, means that you can expect the revenues in the car wash sector to continue growing steadily.

The car wash service is a typical small business industry: classified under SIC code 7542, there are over 29,500 car washes in the US alone. The industry generates a very respectable $4.4 billion each year in gross sales and employs just under 138,000 people. Yet the average car wash is quite small, employing a staff of 5 and having the annual gross revenues around $200,000.

Established, profitable car wash operations are very marketable - the up-front investment of starting a new business can easily tip $2 million! Buying an existing business offers a very attractive alternative of immediate cash flow and steady business growth prospects.

Car wash businesses come in several types: the self-service, conveyor and the highly automated in-bay. The more profitable establishments tend to offer additional value-added services which include on-site detail services, gift and coffee shops, and periodicals for sale.

Business valuation methods for car washes

Given that car washes sell often, there are plenty of market comparables data to do your business valuation. Typical pricing multiples used are selling price to gross annual revenues, discretionary cash flow or EBITDA. The price to cash flow multiples are especially well suited for valuing a business with the above average profitability.

Valuing a Business using Market Comps

Well-established car washes may have considerable goodwill. In these cases, the Capitalized Excess Earnings method is an excellent choice. In addition to showing the value of the business and its tangible assets, you can use this well-known business valuation method to demonstrate the value of business goodwill.

For younger car washes or businesses in a rapid expansion mode, the Discounted Cash Flow business valuation method may be more appropriate. You can demonstrate the value of a business to partners and outside investors based directly on your earnings forecast and risk assessment.

Construction companies are frequent business acquisition targets. The volume of business sales is largely due to the industry size - there are over 346,000 firms in the single-family housing construction alone, classified under SIC 1521.

While this construction industry segment generates over $196 billion in annual sales, the average construction company is small - employing just 3 people and generating around $600,000 in annual revenues.

There is a sizable pool of business buyers looking for construction companies, especially in the mid-market segment - with the profitable firms topping $5,000,000 in gross revenues.

If you own a business in this industry or plan to buy one, knowing the value of your construction company is essential. While standard business valuation methods under the income, market and asset approaches work well for construction business valuation, there are 5 key factors you need to keep in mind:

Construction company worth: 5 key factors

1. Longevity, name and reputation of the business make a big difference to what the company is worth.
2. Value of a construction company is affected by the expected level of repeat business. Established sales and marketing function that does not depend on the current ownership translates to higher business value.
3. Current contract pipeline and billing practices.
4. Accounts receivable collection. Slow collection calls for higher working capital which increases business risk and leads to lower valuation multiples.
5. Availability and retention of key skilled employees.

Often, higher business selling prices are achieved when a company sells to a competitor or a larger firm looking to enter the market.

Construction business valuation methods

Since construction firms sell often, there is plenty of market comps to detemine the construction company worth. Market-derived Rules of Thumb for construction companies under the SIC 15, 16 and 17 are generally based on the business discretionary cash flow or EBITDA.

For owner-operator managed businesses, the Multiple of Discretionary Earnings business valuation method is an outstanding choice. In addition to the business earnings, this method lets you account for the 5 factors above when valuing a construction company.

Well-established construction businesses may have considerable goodwill. Consider using the time-tested Capitalized Excess Earnings method to measure the worth of your construction company, as a sum of its tangible assets and business goodwill.

If you plan to buy or sell an online business, you will be glad to know that the market for privately owned Web based companies is alive and well.

In addition to many individual business buyers, Internet businesses often attract larger players - corporate buyers and private equity investors. Such business buyers can pay a premium for a growing Internet business in order to realize certain synergies with their business investment portfolio.

In this active market, it is important to measure the value of an Internet business you have created or plan to buy. So what is your business worth?

Internet business market value - directly from the market place

The answer is simple: with all the market bustle, there is plenty of recent data on Internet business sales. You can use these business sale comparables to come up with a quick yet defensible estimate of what your Web based business is worth.

The latest release of ValuAdder business valuation software, V3.5.10, makes this task a breeze. You can calculate the market value range, average and median business values using the valuation formula multiples for a number of Internet business types.

Internet business valuation formula multiples available in ValuAdder V3.5.10:

• Online publishers
• Business and consumer e-tail
• Search engine marketing agencies, Pay-per-Click and SEO
• Directory, information and subscription service sites
• Online auctions
• Advertising sites
• Internet entertainment sites
• Website design firms
• Hosting providers and IT services
• Software and technology development firms
• Internet telephony, VoIP
• And many more!

Business valuation for a click-and-mortar operation

If you run an off-line business as well as a website, you can use the market-based rules of thumb to determine the value of a business across 375 industries - including service firms, restaurants, auto repair shops, retail, manufacturing, building contractors, and professional practices, to name a few.

Internet business valuation - 3 ways

Of course, no Internet business valuation is complete without income and asset-based valuation calculations. With ValuAdder, you can cross-check your business market value results using the well-known Discounted Cash Flow, Multiple of Discretionary Earnings and Capitalized Excess Earnings methods to calculate the value of business goodwill and total business value.

Putting together your business sale or purchase

Need to structure the terms of a business sale or purchase? You will find the Deal Check calculation very handy.

If you are an Internet business buyer, ensuring that the terms of your offer make financial sense is key to avoid costly mistakes.

If you are a Web based business owner, structuring effective terms for the business sale keeps you from leaving money on the table.

Insurance brokerage is a growing business. In the US, for example, there are nearly 220,000 insurance brokerage firms.

The industry employs some 1,232,000 people and generates total annual sales of over $355 billion. Most insurance agencies are small businesses with an average staff of 6 and annual revenues of around $1.8 million.

These businesses continue to provide excellent financial rewards to agency owners in return for investment in modern financial management systems, client management and new business development.

Insurance brokers tend to have highly recurring income stream. Attracting and retaining long-term growth clients is very important.

If you are valuing an insurance agency, consider these key business value drivers:

1. Product mix

Insurance agents can offer products in a wide range of markets. Among these are the property and casualty commercial lines, personal, health insurance, and life insurance products.

Group health and consumer insurance lines are frequently more profitable than commercial contracts. Agencies that specialize in health benefits often show good, steady cash flow which drives their business value.

2. Whether the policies are direct or agent-billed

Direct-billed policies tend to have higher client retention rates. As a result, your will find that insurance agencies with high direct-bill rates often command higher business valuations.

3. Contract renewal rates

Existing client policy renewals are critical to the insurance agency’s ability to generate stable cash flow. Renewal rates may be affected by the client base characteristics and client concentration. Agencies whose income stream depends on a few large clients are likely to have business value below the peers with diversified customer base.

4. Licensed employee percentage and tenure

Professional insurance agents are in great demand. If you are looking at an agency whose staff is largely composed of highly skilled, long-term insurance professionals, the valuation multiples tend higher.

This is due to both the expectation of better client retention and ability to develop new business.

5. Independent or captive insurance agencies

Independent agents frequently command higher valuation multiples. This is because some major carriers limit the product choices that their captive agents can offer.

Independent insurance brokers can capitalize on this reduced competition by offering profitable products that are highly customized to meet their clients’ needs. This leads to better client retention, steady profit growth and higher business valuations.

Business valuation techniques for insurance brokerages

You have a number of solid choices to determine the value of an insurance agency. Some guidelines:

Market approach to valuing insurance agencies

Multiples of gross sales commissions are the preferred way to determine business market value in this industry. Again, valuation multiples for agencies with high client retention rates tend to be at the top of the range.

Agency valuation under the Income approach

Because many smaller insurance agencies are acquisition targets for larger firms, business valuations should factor in the potential synergies. The Discounted Cash Flow business valuation method, which enables you to account for key business value drivers directly, is an excellent choice here.

Asset approach to business valuation

Insurance agencies tend to have a large intangible asset base and business goodwill in the form of established clients and carrier relationships. The method of choice here is the Capitalized Excess Earnings - it lets you calculate the business value as the sum of its tangible assets and business goodwill.

Hospitality industry continues to grow at a rapid pace. In addition to the major markets including business and luxury hotels, motels and country inns, recent growth has been fueled by the addition of privately owned establishments that tend to focus on lucrative niche markets. These include specialty bed and breakfasts, destination location inns, fitness oriented resorts, golf course and vacation properties.

Similar to other real estate based operations, hospitality businesses are cyclical in nature. Since much of their income is generated by renting the property, size truly matters.

An industry rule of thumb is that a property needs to have at least 10 rentable units to provide adequate returns for its ownership. Most small privately owned hospitality businesses fall into the 10 - 200 unit range.

Unique factors that drive hospitality business value

These businesses have a number of characteristics that have a major impact on their value:

• They share the features of both business and real estate investment.
• The business tends to be quite labor intensive.
• Multiple profit centers are very common. In addition to property rental, restaurants, gift shops, fitness facilities and lounge are common.
• Repeat and referral business is critical to revenue generation.
• Rental rates are flexible and can be adjusted seasonally and even daily. Successful hospitality operators are quite skillfull in packaging their product to reduce vacancy rates.
• Aggressive and continuous advertisement is essential.
• Effective online presence is increasingly vital, including participation in reservation systems and membership in destination marketing organizations.
• Capital requirements are quite high.
• Businesses demand competent, hands-on management.

Buying a hotel or motel: key success factors

If you review what makes business acquisitions in the hospitality industry successful, you will find that they tend to share a few traits in common:

• Typical leverage is 20% buyer down payment the balance being financed by debt.
• Debt service of under 30% of gross rental income is industry norm. This effectively sets a safety ceiling on the acceptable cost of debt capital.
• Ownership must allocate sufficient capital for hard asset replacement such as Furniture, Fixtures and Equipment.
• Seller financing often makes or breaks a deal.

Determining the business value

When valuing a business in this industry, you should consider these essential elements:

• Property expansion potential. In hospitality industry, business revenues are derived from rent, which is driven by property size.
• Equipment condition and maintenance status. Watch our for deferred maintenance expenses.
• Location. Needless to say, this has direct impact on the business earning potential - both in terms of room rent and vacancy rates.
• Access to acquisition or expansion capital.

That said, you have 3 ways to value a business in this industry:

1. Cost (Asset) approach.
2. Market approach.
3. Income approach.

Cost approach to business valuation

The basic idea behind the asset based business valuation is this: business value equals the current property replacement cost less an allowance for physical, functional and economic obsolescence.

Note that cost based business valuation does not account for the business earning capacity or risk.

Market approach to valuing a business

Under the market approach to valuation, you determine the business value in comparison to actual selling prices of similar properties. Since many private hospitality businesses are quite unique, meaningful comparison may be a challenge.

Business valuation based on income

Under the income valuation approach, you have a number of capitalization and discounting methods to valuing a business. Typical ways to estimate business value are multiples of gross rental income and net operating income. You need to factor in both the property rental income as well as earnings from the other profit centers, such as the restaurant or on-the-premises gift shop.

Multi-year financial analysis is the choice of savvy business investors. A key factor which determines business value is the internal rate of return.

Capitalization rates vary across the business types in the hospitality industry. Typical values are in the 11% - 14% range.

If you need a reliable business value estimate, it is a very good idea to combine the results from several business valuation methods.

Retail industry is very large and its well-being is essential to the health of the overall economy. An an example, the retail market segment represented by the US department stores, SIC 5311, has over 22,000 establishments generating just under 677 billion dollars in annual revenues and employing more than 2,230,000 people.

Retail businesses come in all types and sizes - from a neighborhood specialty shop to large “formula store” chains owned by major multi-nationals. 

Major trends that affect retail business value

A number of important trends are clearly visible on the retail landscape:

• Proliferation of “big box” retail chains.
• Growth of franchise systems.
• Emergence of the Internet as a viable way to reach many retail customers.

The continued advance of large chains has posed serious problems for many small retailers. Many successful stores now focus on niche markets that can be served profitably with a highly targeted product mix backed by excellent customer service - something that small businesses can do very well.

At the same time, franchise systems offer smaller retail operators a “safety in numbers” approach to competing against the large chains. Proven marketing strategies, product selection and good store management systems work to level the playing field.

Internet has come of age as a viable commerce channel. In addition to the “pure play” online businesses, many traditional retailers now have a presence on the Web, effectively becoming the  multi-channel “click and mortar” operations.

Retail business value drivers

Here are a few factors that affect the earning power and value of retail businesses:

• Inventory is the largest investment. Efficient inventory management is a key differentiator for successful retailers.
• Accounts receivable if the business offers credit.
• Relatively high employee turnover. Pay rates are lower than in manufacturing industry.
• Very strong location dependence.
• Shift toward focus on niche markets as a way to combat “big box” competition.
• Addition of services to gain pricing flexibility: “value-added” pricing advantage.

There is increasing use of modern POS (point of sale) and inventory management computer systems. These systems give small retail operators state-of-the-art ways to control costs, improve profitability and cash flow.

Effective inventory management reduces the working capital requirements, increases available cash flow and leads to higher business values.

Key success differentiators that add up to higher retail business valuations

1. Product mix and price. The retailer’s skill in developing a compelling product mix that is priced just right for the target market is key to creating repeat customers and traffic growth through referrals. And business growth prospects directly affect how much the business is worth.

2. Convenience such as store hours and location are critical to generating the foot traffic and developing customer loyalty. Repeat business tends to lower the marketing costs and smooth out the bumps in the business earnings - important business value enhancing factors.

3. Customer service. Nothing is more important to growing a solid repeat customer base than excellent service. Many small retailers realize this and make their stores into true destinations for the regulars. Superior customer retention tends to translate into lower operating costs and higher profit margins - and higher business value.

4. Store layout. Attractive, well organized store helps the customers stay longer and spend more money. Efficient use of the shop floor space results in higher revenue per square foot. Since valuation multiples based on store revenues are very common in valuing retail businesses, higher revenues tend to go with higher business values.

Key points to consider when valuing your retail business

1. Carefully recast your historic financial statements. Your goal is to demonstrate the true earning power of the business. Retail businesses are appraised based on cash flow, using seller’s discretionary cash flow or net cash flow as the earnings basis. Business cash flows can be very different from its profits!

2. Prepare an earnings forecast. As many a seasoned business broker will tell you, business buyers pay for the past, but buy the future. Not surprisingly, the business earnings prospects are more important when determining the business value, than its past financial performance.

3. Review the business asset base. Your cost-basis balance sheet may show asset values very different from their current fair market value. If you value a retail business using an asset-based business valuation method, you need to reconstruct the company’s balance sheet accordingly. Pay special attention to the values of inventory and furniture, fixtures and equipment.

Retail business valuation methods

As with any industry, you have quite a number of methods to choose from. A good practice is to use several methods under the standard Market, Income and Asset business valuation approaches. Here are a few suggestions that are very often used to value retail businesses: 

Market comparables

Given the retail industry size, it is not surprising that a number of closely held retail businesses change hands regularly. You can use the sales data to compare your business to similar businesses that sold recently. Such sales data is typically used to derive the so-called pricing multiples. 

The pricing multiples are ratios which relate the business selling price to its revenue, net sales, cash flow, net profit or EBITDA, and business assets. Using such multiples, you can estimate your business likely selling price, using your business financial parameters.

Multiple of Discretionary Earnings

This income-based business valuation method is a very good fit for valuing owner-operator managed retail shops. In addition to accounting for the business earnings and industry growth, this method lets you factor in such important business parameters as location, competitive environment, ease of operation, quality of the staff and overall desirabilty.

Capitalized Excess Earnings

Asset-rich retail businesses are frequently valued using this classical business valuation method. The method seeks to establish the business value as the sum: 

Business value = net tangible assets  + business goodwill

If you are looking to value an established business which has become a true “institution” in its market, Capitalized Excess Earnings is an excellent way to show the value of business goodwill.

You can measure the value of a manufacturing firm using a number of well-known methods under the market, income and asset approaches to business valuation. However, to get accurate business valuation results you need to focus on two key points.

1. Identify and include all income-producing assets in your manufacturing company valuation. 

More so than most other business types, manufacturing firms use a large number of assets. Property, plan and equipment typically represent a large portion of the manufacturing company’s investment.

Off-balance sheet assets such as internally developed intellectual property are very common. Product and process technologies can be licensed to generate additional income streams which increase business value.

At the same time, a manufacturing firm may have some assets on the books that do not currently contribute to income generation. Other assets, such as plant capacity, may not be fully utilized to produce income. If fully exploited, the value of these assets can be substantial.

2. Base your business valuation on a realistic cash flow forecast and business risk assessment. 

Accurate estimation of the income-producing capacity for a manufacturing business may be challenging. Yet it is essential in defining what the business is worth.

Manufacturing firms invest heavily in developing new products and processes. And all products have a finite lifecycle. Without constant innovation, technology obsolescence sets in quickly, reducing the income derived from product sales.

The levels of investment needed, and the accuracy of sales projection make a major difference to the manufacturing firm’s income prospects. Market acceptance of new products and competitive response also affect how successful a product launch is.

In terms of valuing a manufacturing business, this requires that you capture these elements in your cash flow forecast and business risk assessment.

Recasting historic financial statements for manufacturing business valuation

To determine the value of a privately owned manufacturing company, you need to construct an accurate picture of the business assets and income. You do this through the process of recasting the historic balance sheet and income statements.

Balance sheet reconstruction for valuing a manufacturing company

Here are a few guidelines for recasting your balance sheet:

Assets:

• Remove cash levels in excess of operating requirements.
• Remove uncollectible accounts receivable. Check the aging report.
• Adjust all inventory to market value, focusing on the work-in-process and finished goods levels. Remove obsolescent inventory.
• Adjust all long-term assets to their fair market value. In a business sale situation, include only those hard assets that will be included in the transaction.
• Determine the current value of any prepaid expenses.
• Remove shareholder loans.
• Value the business owned real estate separately.

Liabilities:

• Ensure that all currently owed amounts are included in the accounts payable.
• Verify all accrued expenses such as payroll and taxes due.
• Determine the customer deposit levels and only include those that can be transferred to the business buyer.
• Remove loans from business owners.
• Remove any real estate loans.
• Identify any contingent liabilities that may not appear on the historic balance sheet. Examples are possible legal expenses, and regulatory compliance costs.

Recasting the company’s income statements and preparing cash flow forecasts

Your focus when recasting the historic income statements and preparing a future cash flow forecast is to show an accurate picture of the business earning potential. The key points to consider are these:

Sales:

• Realistic revenue projections from sales of new products and services.
• Can historic levels be sustained in the future? Consider the product lifecycle and competition offerings.
• Review the current sales order backlog against historic numbers.
• Check the accrual of customer deposits against actual product delivery.
• If some customers account for a larger percentage of sales, assess the likelihood of this continuing. Adjust your sales projections if sales to some large customers can be lost.

Cost of Goods Sold:

• Supplier stability and anticipated cost trends.
• Watch out for changes in inventory costing and direct labor accounting.
• Assess the risk of reliance on “single-source” suppliers.
• What prices and terms will the business buyer receive?

Expenses:

• Check and adjust for owner-discretionary spending such as auto, advertising, phone, travel and entertainment expenses.
• Make sure that there is adequate business insurance and account for any premium increases if needed.
• Remove any personal charges from the professional expenses such as legal and accounting fees.
• Identify all compensation components for the principal owner-operator. This is an important part of your seller’s discretionary cash flow estimation.
• Adjust the salaries of all other working owners to market rates. This is also known as the “manager replacement” adjustment.
• Check the rent expense. If the business sells and a new lease needs to be signed, your cash flow forecast should reflect this change.

Choosing the business valuation methods

With your financial statement adjustments and forecasts ready, you can choose your business valuation methods. Some of these methods are especially useful when valuing a manufacturing business:

Market-based valuation of manufacturing businesses

Under the well-known Comparative Transaction Method, you basically compare your business with similar manufacturing companies that have sold in the recent past.

There is a strong market for private firms in many segments of the manufacturing industry. Pricing multiples derived from such business sales can help you determine the fair market value of your business in a very compelling way.

For small manufacturing firms, the pricing multiples of choice are based on the business revenues and earnings. In other words, you can estimate your business value by applying such multiples to your own business revenue or earnings.

Income-based business valuation: Discounted Cash Flow and Multiple of Discretionary Earnings methods

The Discounted Cash Flow method is a common way to value manufacturing companies. You can obtain very accurate business valuation results based on your business cash flow forecast and the discount rate, which captures the business risks. You can determine the discount rate using standard cost of capital models such as the Build-Up or CAPM.

The Multiple of Discretionary Earnings method is another choice when valuing a small manufacturing company. You can get excellent valuation results while accounting for a broad range of business financial and operational factors. To estimate the business value, this method requires a single-valued estimate of seller’s discretionary cash flow as its earnings basis.

Asset-based valuation of manufacturing business: Capitalized Excess Earnings method

A well-known Capitalized Excess Earnings method is a frequent choice to value manufacturing firms under the Asset approach. In addition to determining the total business value, this classical method lets you determine the value of business goodwill.

You can also use your valuation analysis results in order to allocate the business purchase price across the assets. Proper purchase price allocation is an important tax-minimization strategy following the business purchase.

Food service is big business. In the US alone, over 570,000 eating and drinking establishments generate nearly $375 billion in annual revenues and employ some 6.8 million people.

The industry landscape is increasingly dominated by regional or national chains which account for more than 70% of the market. Yet the average restaurant grosses $1,200,000 and employs just 17 people. And there is still opportunity for indepedent restaurant owners with innovative concepts to tap into affluent niche markets, especially in major metro areas.

Approaches to restaurant valuation

As with any business, you can approach restaurant valuation three ways:

• Asset approach
• Market approach
• Income approach

Given the diversity of businesses in the food and drink industry, there is no single “formula” to measure what a restaurant is worth. To get accurate results, you should consider a number of business valuation methods under these approaches.  

4 key restaurant value drivers 

A number of factors affect what a business is worth. For restaurants, the key value drivers are these:

1. Track record of sustainable sales growth.
2. Stable earnings.
3. Condition of furniture, fixtures, equipment and leasehold improvements.
4. Lease terms.

How well the restaurant stacks against its competitors across these key value drivers affects its value. For example, you can use pricing multiples under the market approach which are derived from sales of similar restaurants.  

You determine your restaurant value by applying these multiples to your gross revenues or seller’s discretionary cash flow. Typically, the revenue and cash flow bases are calculated as averages over several years. Hence, if your restaurant shows stable, above average sales and cash flow, its value will be higher.

Income-based business valuation methods are very often used for valuing restaurants. The Multiple of Discretionary Earnings method, in particular, is very well suited for valuing owner-operator managed food service businesses.

In addition to the four key factors above, this method lets you account for such important elements as the restaurant location, its employee base, and ease of operation. Needless to say, a “turn-key” operation is more desirable than a poorly organized business and is likely to command a higher selling price.

Condition of the restaurant assets determines the amount of capital reinvestment to keep the business running. If the restaurant requires significant investment for renovation, concept change or code compliance, the savvy buyer would discount the offer price accordingly.

Rent is a significant part of a restaurant’s operating expenses. Generally, rent which exceeds 10% of the gross revenues is considered excessive. Experienced restaurant buyers would discount the offer price to bring the rent expense in line with the industry norms.

Professional practices come in many types: dental and medical practices, law and accounting firms, architecture and engineering consulting companies, individual and business professional consulting firms.

While a professional practice may look like a service business, there are key differences to bear in mind that affect what a practice is worth.

Top reasons why a professional practice is valued

Remember that your choices of business valuation methods and, ultimately, the results you get will depend on the reasons for practice valuation. So, what are the typical situations calling for valuation of a professional practice? Here are the top ones:

• Ownership transfers, such as the practice sale, partner buy-in or buy-out.
• Legal disputes involving partner disagreements and divorce.

Less frequently, a professional practice may be valued for:

• Estate planning and taxation purposes.
• Bankruptcy and reorganization.
• Practice acquisition and expansion financing.

Differences between a professional practice and other service businesses

Most professional practices share a few key traits that set them apart from other service-oriented businesses. Assessing the practice in light of these traits is important to your selection of key valuation inputs: the cash flow projections, valuation factors, discount and capitalization rates.

1. Price sensitivity

Typically, professional practice clients are less cost conscious than customers of other service businesses. They look for the right expertise to adress a critical need even if it costs more. Professional practices are less susceptible to abrupt pricing pressures such as deep discounts or low cost substitutions. This affects the practice cash flow projections and, in turn, what the practice is worth.

2. Professional reputation and skill

The reputation of a professional practice and demonstrated skills of its practitioners are very important to its success. This means that a large part of the practice value resides in its professional practitioner and institutional goodwill, not its tangible assets.

3. Reliance on referrals

Most clients seeking professional services get referrals from people they know - relatives, friends and other professionals. Strong referral network represents a key factor which contributes to the practice value.

4. High intangible asset base

More so than most service businesses, professional practices show a high level of intangible assets. Many of these assets do not appear on the practice’s Balance Sheet, hence have no “book value”. However, they often represent the most important and valuable assets the practice has. Consider using the business valuation methods which measure business goodwill, such as the Capitalized Excess Earnings method.

5. Licenses and protected market

Many professionals are licensed practitioners. This has two significant effects on the practice value. First, it moderates competition by limiting the number of entrants in the market. Second, it limits the pool of potential buyers that are qualified to acquire and run the practice.

Now, the practice’s fair market value is established in the competitive market place. Hence, the level of competition among the practice buyers has a major effect on what it is worth.

6. Client relationships and practice sale

Here is an important question: if the practice is offered for sale, can it be successfully transferred to the buyer? The answer often depends upon the level of professional goodwill. Some professional practices are quite challenging to sell because of the close relationship of its clients to the individual practitioner.

Uncertainty about the transfer of practitioner goodwill is one reason why you frequently see earnouts as part of a professional practice sale.

7. Professional practice life expectancy and value

A professional practice may have a shorter expected life span than other service businesses. This affects how you do income projections for the practice. And the income projections form the basis of such business valuation methods as Discounted Cash Flow. Importantly, the assumption of perpetual income stream may not be appropriate when valuing a professional practice. This reduces the practice’s residual value.