Despite the current economic headwinds, many building maintenance service companies with established client contracts continue to thrive. There are some 92,300 such firms in the US alone, classified under the SIC code 7349.

The industry segment contributes an impressive $28B in annual revenues to the economy employing just under 840,000 people. The typical janitorial services company is quite small - generating around $300,000 in gross annual sales with a staff of 9.

Business valuation methods for janitorial service companies

Given the size of the market and the recurring need to clean and maintain office buildings, the janitorial companies tend to be “recession-resistant”.

Companies with stable earnings from long-term commercial contracts are bought and sold regularly. This is very good news: business selling prices and terms from such deals offer you an excellent way to estimate the value of your janitorial service company.

The typical tools are valuation multiples that relate the actual selling prices of similar companies to their financial performance. You can apply these valuation multiples to estimate the value of your company based on its revenues, profits, EBITDA, cash flow, asset base and owners equity.

Example: valuing a building maintenance business using valuation multiples

To demonstrate this market approach to valuing a business, let’s pick a typical private janitorial service company with the following current financials:

• Gross revenue: $300,000.
• Net sales: $290,000.
• Net income: $60,000.
• EBITDA: $75,000.
• Seller’s discretionary cash flow (SDCF): $110,500.
• Furniture, fixtures and equipment (FF&E) assets: 55,000.
• Inventory: $10,000.
• Book value of owners’ equity: $35,000.

To calculate the fair market value of this business, we choose a set of sensible valuation multiples as follows:

Note that this averages to about 0.86 times the business gross revenues.

Other business valuation methods for janitorial service companies

To supplement the market-based valuation and check your results, consider using the Multiple of Discretionary Earnings method. This well-known technique lets you assess business value from a totally different point of view: based on the company’s earning power and 14 key financial and operational performance factors.

Companies with a long history of success in their market may have built up significant business goodwill. As a result, they may be worth well above the value of the business tangible assets. The Treasury Method is a great choice to calculate the value of business goodwill and total value for such firms.

With a global focus on sustainable manufacturing, scrap metal recycling is a key growth industry segment. Classified under the SIC code 5093, there are just under 8,200 metal recycling companies in the US alone. The industry as a whole generates some $21.1B in annual revenues and employs close to 75,600 people.

Yet an average metal recycling firm is quite small - with around $3,000,000 in annual sales and a staff of  9.

Business valuation methods for metal recycling companies

Being in a growth segment usually means there is considerable investor appetite for business acquisitions. Indeed, scrap metal recycling businesses sell quite often.

The recent sales of similar businesses offer you an excellent way to determine you company value. Valuation multiples that relate the actual business selling prices to key financial performance measures are the typical valuation tools.

Using valuation multiples derived from recent recycling business sales, you can develop an accurate estimate of value for firm in this industry segment. The most common valuation multiples used for valuing metal recycling businesses are these:

• Business selling price to business gross revenues or net sales.
• Price to gross profit.
• Price to net income.
• Price to EBIT and EBITDA.
• Price to seller’s discretionary cash flow.
• Price to business assets.
• Price to owners’ equity.

Example - valuing a metal recycling company using valuation multiples.

To demonstrate how the value of a business in this industry can be determined, let’s select a firm with the typical financial performance as follows:

• Gross annual revenue: $3,000,000.
• Net sales: $2,900,000.
• Gross profit: $1,000,000.
• Net income: $250,000.
• EBIT: $145,000.
• EBITDA: $282,500.
• Seller’s discretionary cash flow (SDCF): $750,000.
• Furniture, fixtures and equipment (FF&E) assets: $400,000.
• Inventory: $355,200.
• Total business assets: $950,000.
• Book value of owners’ equity: $600,000.

Next, we apply a set of reasonable valuation multiples and come with the following business valuation results:

Fair market value or investment value?

Market based valuation as this example illustrates tends to be a great way to determine the fair market value of your business. This is because the valuation multiples are derived from a large number of comparable business sales, establishing the “going rate” for similar business investments.

Exceptional companies may attract very strong investor interest. Professional investors that are looking for synergies to enhance their portfolio in your market segment may be willing to pay a premium for the right business opportunity. As a result, your actual investment business value may well exceed the fair market value estimate.

Continuing our discussion about valuation of software services companies, let’s focus on the market valuation approach.

A central technique under this approach is the comparative transaction method. It is especially useful for valuing private software firms. In a nutshell, the method lets you determine the value of your software firm in comparison to similar companies that have recently sold.

Privately owned software companies with a solid track record of profitability are frequent acquisition targets. You can study the selling prices of successfully closed deals in relation to the financial performance of such companies.

Valuation multiples

Valuation multiples are the usual tools to estimate the fair market value of your software company using the market approach. For example, you can calculate your company value in relation to its revenues, gross profit, net income, EBIT, EBITDA, discretionary cash flow or business assets.

One of the main advantages of using such valuation multiples is that they are based on actual sales thus offering a highly objective and defensible way to estimate what your software company is worth. This is especially useful if you need to prove your business value to a skeptical investor, or defend your valuation in court or before the tax authorities.

Example - valuing a custom software development company using valuation multiples

We will take a typical contract software development firm with the following financials:

• Gross revenue: $1,300,000.
• Net sales: $1,200,000.
• Gross profit: $1,000,000.
• Net income: $230,000.
• EBIT: $370,000.
• EBITDA: $385,000.
• Seller’s discretionary cash flow (SDCF): $400,000.
• Furniture, fixtures and equipment (FF&E) assets: $450,000.
• Total business assets: $500,000.
• Book value of owners’ equity: $225,500.

We pick a set of reasonable valuation multiples and estimate the value of this software company as follows:

Each business value estimate can shed a different light on what drives the value of your software company. For example, a high business valuation result based on EBITDA may point out that the company manages its profitability better than the industry average.

An asset rich firm will likely show a higher business value estimate based on the value of its total assets, both tangible and intangible, such as internally developed technology or business processes.

Using business valuation as a strategic tool

Showing how business value depends on your company performance in this way can help you in strategic planning and decision making.

A key question: what value factors can be improved to increase the overall business value? You can focus on the areas that can enhance the value of your company, then measure the result by repeating your business appraisal.

If you own a private mailing business or need to appraise one for a client, here are some interesting statistics to consider:

Mail box rental and shipping companies are classified under the SIC code 7389 and NAICS 561. This business services sector has just under 1,500,000 firms that generate over $301B in annual revenues.

The business services industry segment employs some 3,639,000 people. Yet the average firm is definitely small business: with annual sales of $200,000 and a staff of just 2.

Business valuation methods for mail box rental and shipping firms

Successful private mailing companies sell quite often. You can develop a very good idea of your business value by comparing it to the companies that sold recently. Using the valuation multiples derived from such business sales, you can calculate the fair market value of your business based on its revenues, gross profit, net income, EBIT and EBITDA, the business asset base and owners’ equity.

Example: valuing a mail box rental business using valuation multiples

To demonstrate this market approach to valuing a business, let’s take a typical mail box rental and shipping firm with the following financials:

• Annual gross revenue: $200,000.
• Net sales: $185,000.
• Gross profit: $120,500.
• Net income: $17,000.
• EBIT: $18,900.
• EBITDA: $19,250.
• Seller’s discretionary cash flow (SDCF): $75,000.
• Furniture, fixtures and equipment assets (FF&E): $50,000.
• Inventory: $4,500.
• Total business assets: $61,500.
• Book value of owners’ equity: $44,000.

We next pick a set of sensible valuation multiples to calculate the value of our example business as its potential selling price:

Other business valuation methods for private mailing service companies

No business valuation is complete without the use of several methods under each approach: Asset, Income and Market. Since many mail box rental and shipping businesses are owner operated, the Multiple of Discretionary Earnings method is an excellent complement to verify your market value assessment.

Using this well-known income-based valuation method, you can create a comprehensive appraisal based on the business earnings and 14 critical financial and operational performance factors.

If the business has established itself in its market place over many years, chances are there is considerable goodwill. To determine the value of business goodwill, consider using the classical Capitalized Excess Earnings method. Known as the Treasury Method, this valuation technique lets you calculate the value of business goodwill and total company value.

Do you own a lanscaping services company? Need to determine the value of your own business or prepare an appraisal for a client? Here are some interesting industry statistics to consider: 

Key landscaping industry statistics

Classified under SIC code 0781, there are over 49,370 landscaping planning, design and counselling establishments in the US alone. The industry as a whole generates $10.9B in annual revenues and employs over 205,000 people. Yet an average landscaping company is a typical small business: it produces around $200,000 in annual sales with a staff of 4.

Business valuation of landscaping companies

By far the most objective evidence of what a landscaping company is worth is recent sales of similar businesses. Business appraisers refer to this business valuation technique as the Comparative Transaction Method.

Valuation multiples derived from such business sales offer you an excellent tool to estimate your business value. Here are the typical multiples used for landscaping business appraisals:

• Multiple of gross revenues or net sales.
• Multiple of gross profit.
• Multiple of net income.
• EBIT and EBITDA based valuation multiples.
• Multiples relating your business value to its fixed or total assets.
• Business value as a multiple of owners’ equity.

Example: valuing a landscaping company using multiples

Let’s take a typical landscaping services firm with the following financial parameters:

• Annual net sales: $600,000.
• Gross profit: $410,500.
• Net income: $56,250.
• EBIT: $57,000.
• EBITDA: $59,600.
• Total business assets: $195,000.
• Book value of owners’ equity: $102,500.

We next pick a set of reasonable valuation multiples to calculate the company value as follows:

Asset and income methods for valuing a landscaping business

To complement your market-based valuation,  consider the the well-known Multiple of Discretionary Earnings method. This income-based business valuation technique is especially suitable for valuing owner-operator managed landscaping service companies.

For a business that has excellent reputation in its marketplace, the value of business goodwill can be considerable. To appraise the value of business goodwill, consider using the Capitalized Excess Earnings method, known as the Treasury Method. Many professional business appraisals use this asset-based method to value goodwill as well as determine the total business value.

If you own a software firm, plan to start one or acquire an existing company, here are some interesting facts to consider:

The two main segments of the software industry are custom software services and pre-packaged products.

Software development services firms

Classified under the SIC code 7371, the firms in the software service industry concentrate on creating solutions for clients, usually other businesses.

The industry segment as a whole counts over 49,500 establishments in the US alone. These software companies employ around 572,000 people and generate over $57.7B in annual sales. The average contract software development company makes about $1.3M in annual revenues and employs a staff of 12.

Software product development companies

Software companies that develop and sell their own products are classified under the SIC code 7372. The pre-packaged software industry has just under 19,000 firms operating in the US market with a total employment force of some 264,000.

The segment generates an impressive $152B in annual sales. An average company does about $9.2M in revenues per year with a staff of 14.

One interesting observation you can make is that the software services industry creates fewer dollars with more people. One reason is that the software services are more labor intensive. However, the service companies have an easier time establishing a loyal customer base and recurring business.

Key value drivers for software companies

Regardless of which market segment your software company is in, these key factors make the major difference to its value:

Earnings growth prospects

Software products can be highly profitable if focused on the right market segment with significant demand. Product firms especially can experience significant revenue growth quickly with the right product mix.

Profitability

Keeping costs under control is not an easy task for a software company. The costs of developing and marketing software products are very high. The firms that manage growth while keeping their cost from escalating are far more valuable than their unprofitable counterparts.

Stability of earnings

Maintaining consistent level of sales and profitability can be very difficult especially for pure product software companies. Competition can introduce an alternative product and sudden market changes can make a star product obsolete very quickly.

This is where the service companies tend to do better - the customer loyalty tends to translate into repeat business, stable prices and steady earnings. The costs of entering the new market segments are also lower for software services companies as they tend to rely on  existing customers and referrals to do so.

Business valuation methods for software companies

As with any business, you can value a software company three ways, known as appraisal approaches:

• Asset - based on the company’s asset base.
• Income - based on the firm’s earning power and risk.

Established software firms tend to be frequent acquisition targets. Hence, there is solid evidence of their market value as shown by the actual business selling prices. Thus, you can use the market valuation methods quite effectively to appraise your software business.

At the same time, the growth potential is a key element of value in any software company. Income-based business valuation methods, such as the Discounted Cash Flow technique, are an excellent choice to value a software firm.

Combined Market and Income approach: First Chicago Method

For a highly accurate business appraisal, you can combine the two approaches. This technique is often referred to as the First Chicago method. Under this method, you can assess the value of your software business using the Discounted Cash Flow method. This requires that you create a set of earnings forecasts and assess the business risk. 

Since the future is never certain, you can improve the accuracy and validity of your business appraisal by repeating the Discounted Cash Flow analysis under a couple of possible scenarios, such as the worst case and best case outcomes. You can average the results to come up with an estimate of what your company is worth.

The market comparisons serve as the objective proof to back your income-based valuation results. Since the market valuation is based on the actual data on similar business sales, it tends to act as a sanity check on your forward-looking income-based valuation.

Again, combine the income and market-based valuation results for a highly defensible, comprehensive estimate of what your software company is worth.

Privately owned and operated florists are a major part of the retail industry. Classified under the SIC code 5992, there are around 35,650 such establishments in the US alone. The industry as a whole generates an impressive $6.6B in annual revenues and employs over 135,000 people.

Yet an average flower shop is a classical small business: producing around $200,000 in annual sales with a staff of 4.The industry is highly fragmented with the top 5 companies accounting for less than 2.5% of the total industry revenues.

Key value drivers for retail florists

The product for flower shops is arranged cut flowers that usually account for over 50% of a store’s revenues.  Florists with significant commercial accounts that tend to result in stable recurring revenues are valued above the average.

Another key value driver is an attractive store location with the rent expenses below 6% of the shop’s gross revenue. The highest valued flower shops are located away from the major “big box” competitors such as do-it-yourself home improvement or grocery chain stores.

The florists that focus on the special event and gift market segments tend to command higher business valuations. Essentially, such flower shops differentiate on superior service that leads to customer loyalty, higher profitability and, not surprisingly higher business value.

Sales from an online presence or phone orders tend to be more cost-effective ways to generate sales. Some of the most valuable flower shops achieve close to 80% of their revenues through these channels.

Business valuation methods for flower shops

Florists with a track record of highly stable, above average earnings are very desirable and sell often. If you study such business sale comparables, you can develop a very good idea of what your business is worth.

The typical tools to estimate your business value is to use the valuation multiples derived from such business sales. The multiples relate the actual flower shop selling prices to their financial performance.

Thus, you can calculate your business value in relation to its revenues, profits, EBIT, EBITDA, cash flow, assets or owners equity.

Here are the typical valuation multiples used to estimate the value of a flower shop:

• Business value based on gross revenue or net sales.
• Business value based on net income.
• Business value based on EBIT and EBITDA earnings.
• Business value based on the seller’s discretionary cash flow.
• Business value based on the furniture, fixtures and equipment assets.

Flower Shop Valuation using Business Sale Comps

Example: valuing a flower shop using valuation multiples

To demonstrate the idea, let’s pick a typical retail florist business with the following financials:

• Business gross revenue: $250,000.
• Business net sales: $225,000.
• Net income: $35,553.
• EBIT: $36,000.
• EBITDA: $39,500.
• Seller’s discretionary cash flow: $154,247.
• Furniture, fixtures and equipment assets: $25,307.
• Inventory: $4,601.

We pick a set of reasonable valuation multiples to calculate the value of the business as follows:

Other methods to use for valuing a florist business

You can value an established owner-operator run flower shop by the well-known Multiple of Discretionary Earnings method. This income-based business valuation technique lets you determine the value of the business based on its earnings outlook and a set of key financial and operational performance factors.

Since many privately owned florists are lifestyle businesses, the Multiple of Discretionary Earnings is particularly well suited for their business valuation.

For a florist that has created an solid reputation in its market, the value of business goodwill can be considerable. To appraise such a business, consider using the Capitalized Excess Earnings method, known as the Treasury Method. This technique is specifically intended to help you determine the value of business goodwill and total business value.

Classified under the SIC code 8011, the primary care physician practices are part of a large professional health practitioners service industry. In fact, there are over 373,000 medical practices in the US alone.

The industry as a whole generates some $202B in annual revenues, and employs over 3,000,000 professional and office staff. However, a typical medical practice is small business: producing around $600,000 in annual sales with an average staff of 8.

Medical practices tend to generate highly stable earnings due to the repeat business that arises out of an established and loyal patient base. As a result, established practices are a frequent acquisition target. Selling prices of similar physician practices offer you an excellent way to estimate the market value of your own practice or one you are interested in acquiring.

Market based practice valuation using multiples

In order to estimate the value of a medical practice, you can use a number of valuation multiples. Derived from recent sales of similar practices, the multiples relate the actual selling prices to the practice financial performance measures. The typical valuation multiples used in appraisals are:

• Selling price to net annual sales
• Price to gross profit
• Price to net income
• Price to EBIT and EBITDA
• Price to total practice assets
• Price to owners’ equity

It is a good idea to use a number of such valuation multiples for accurate business valuation. Each estimate may differ depending on how well your specific practice does compared to its peers. The result is a range of values, or some weighted average of all the practice value estimates together.

Example: using valuation multiples to value a primary care medical practice

Let’s consider a typical private medical practice with the following financials:

• Annual net sales: $600,000
• Gross profit: $585,000
• Net income: $80,000
• EBIT: $82,500
• EBITDA: $84,000
• Total practice assets valued at: $250,000
• Book value of owners’ equity: $11,000

For this example, we pick a set of reasonable valuation multiples and apply them to the financials. The practice value results are as follows:

Note the considerable variation in the results. That’s because our example medical practice compares less favorably with its peers when it comes to the owners’ equity measure and profitability.

Other business valuation methods to consider

To be defensible a medical practice appraisal usually relies on a number of business valuation methods. Since physician practices tend to create considerable business goodwill, the Capitalized Excess Earnings valuation method is a common choice.

Practice goodwill valuation: a common requirement in divorce cases

This is especially so in cases of marital dissolution in those jurisdictions that treat professional practice goodwill as part of the marital estate. You may have to split the goodwill into the personal and institutional parts depending upon the way the court in your jurisdiction handles the distribution of goodwill assets.

Direct capitalization techniques such as the Multiple of Discretionary Earnings valuation method are another common choice for valuing owner-operator managed physician practices. The method provides a very consistent way of calculating the practice value based on its earnings and a set of financial and operational performance factors.

Valuation using a Set of Standard Methods

If you own a land surveying firm or plan to acquire one, here are some interesting industry statistics. Classified under the SIC code 8713, there are some 12,900 such establishments in the US alone, employing over 78,000.

While the industry as a whole generates $4.6B in annual revenues, the average land surveying company is small business, employing a staff of 6 and making around $400,000 in annual gross revenues. In fact, 97% of surveying practices employ fewer than 24 staff!

Business valuation of surveying firms: Market Comps

Established, profitable land surveying practices are highly desirable acquisition targets. Hence, there is considerable market evidence of selling prices for such firms. You can use these Market Comps in order to develop a good idea of what your surveying company is worth.

Valuation multiples calculated from such comparable surverying firm sales lets you related your business financial performance to its potential selling price and, therefore, the company’s fair market value. Here is a list of valuation multiples that are typical in the industry:

• Price to gross revenues
• Price to net sales (less returns and discounts)
• Price to gross profit
• Price to net income
• Price to EBIT
• Price to EBITDA
• Price to seller’s discretionary cash flow (SDCF)
• Price to furniture, fixtures and equipment (FF&E) assets
• Price to total assets
• Price to book value of owners’ equity

You can develop a very comprehensive idea of what your surveying practice is worth by using this set of valuation multiples. For an example, see the sample ValuAdder Business Market Value Report.

Example: using valuation multiples to appraise a surveying firm

To show how the Market Comps and valuation multiples can be used to value a surveying company, let’s pick a hypothetical firm with these financial parameters:

• Annual gross revenue: $500,000
• Net sales: $480,000
• Gross profit: $430,000
• Net income: $40,000
• EBIT: $45,000
• EBITDA: $47,000
• SDCF: $275,000
• FF&E assets: $175,000
• Owners’ equity: $50,000

We apply a set of reasonable valuation multiples and calculate the business value across all 9 financial performance factors. Here are the results:

Notice that the business value estimates based on the discretionary cash flow and assets are higher than the average. That’s because our example firm excels in its ability to generate positive cash flow and has a relatively high asset base.

If you own an established industrial equipment rental and leasing business, plan to buy one or need to provide a business appraisal for a client, consider adding the market-based valuation methods to your toolkit.

Classified under the SIC code 7377, profitable firms operating in a well defined, protected niche, are quite valuable and sell often. This means that there are plenty of business sale comparables you can use to estimate what your company is worth. Indeed, comparison to recent sales of similar businesses offers your the most convincing way to determine and prove the value of your own business.

Business valuation by the Comparative Transactions Method

This market-based technique is formally called the Comparative Transaction Valuation Method. The typical tools are a range of valuation multiples derived from past business sales.

These multiples relate the actual business selling prices to some measure of financial performance, including the equipment rental business gross revenues, net sales, gross profit, net income, EBIT and EBITDA, discretionary cash flow, assets and owners equity.

Once you know the valuation multiples for your business, you can calculate the fair market value of your firm by applying the multiples to your company’s financial performance parameters.

For example, if the median price to gross revenues multiple is 0.4 and your company’s current gross revenues are $4,000,000; then the estimated business value is $1,600,000. You can apply other multiples to refine and cross-check your estimate.

Example: market-based valuation of an equipment rental business

Let’s take a typical privately owned equipment rental and leasing firm with the following financials:

• Gross revenues: $4,000,000.
• Net sales: $3,750,000.
• Gross profit: $1,200,000.
• Net income: $50,000.
• EBIT: $80,000.
• Seller’s discretionary cash flow (SDCF): $270,000.
• Inventory: $620,000.
• Total assets: $1,500,000.
• Owners’ equity: $700,000.

For this example, we pick a set of reasonable valuation multiples as follows:

• 0.4 times the business gross revenues.
• 0.45 times the net sales.
• 1.25 times the gross profit.
• 25 times the net income.
• 17 times the EBIT earnings.
• 1.7 times the SDCF (SDE).
• 1.3 times the business total assets.
• 3.5 times the owners’ equity.

Applying these multiples to the company’s financials above, we get the following business valuation results:

A single number or a range of business values

Note that calculating the average is just one way to assess what your business is worth. You can also use the set of business valuation results to establish a range of values, from low to high. In this example, your company’s market value is likely to be between $1,079,000 and $2,450,00.

Using Market Comps for Business Valuation

If you own a small animal veterinary practice, consider buying one or plan to open a new clinic, here are some interesting industry statistics.

Classified under the SIC 0742 code, there are over 37,000 vet practices in the US alone. The industry as a whole generates some $12.2B in annual revenues and employs more than 264,000 people. The average vet clinic is quite small - generating around $300,000 in annual sales with 7 professional and support staff.

Key value drivers for a veterinary practice

While each vet practice is unique, a number of common factors contribute to the practice value. Here is the short list:

• Practice size. Multi-doctor vet practices tend to be more valuable than a single practitioner clinic.
• Location. Practices located in urban areas usually command higher valuations.
• Specialty area. Small animal veterinary clinics are generally more marketable than large animal practices. As a result, small animal vet practice valuations are typically higher.
• Asset base. Most vet practices sales are asset sales. A clinic with significant furniture, fixtures and equipment assets is likely to command a higher valuation.
• Market position. Well-established clinics can create considerable business goodwill. These practices tend to be above average in client profitability and client retention. As a result, their valuations are usually above the industry norm.

Business valuation methods for veterinary practices

As with many other professional service firms, you can value a veterinary practice using a number of methods under the standard asset, income and market valuation approaches.

Successful vet practices are frequent acquisition targets. If you need to determine the market value of your clinic, comparison to recent selling prices of similar practices is a good choice.

You can calculate your business value based on the practice’s financial performance and the valuation multiples derived from comparable practice sales. These multiples are ratios that relate the actual practice selling prices to its revenues, profits, cash flows, assets or owners’ equity.

Here are the valuation multiples commonly used in valuing veterinary practices:

• Sale price to annual net sales or gross revenues.
• Sale price to EBITDA and EBIT.
• Sale price to net income.
• Sale price to seller’s discretionary earnings (SDE).

Example - valuing a private veterinary practice using valuation multiples.

Let’s consider a typical vet clinic with the following financials:

• Practice annual net sales: $300,000.
• EBITDA: $56,000.
• Net income: $33,000.
• Seller’s discretionary earnings: $110,000.

We pick a set of reasonable valuation multiples and estimate the practice value as shown in this table:

By convention, these practice value estimates include most business tangible assets and goodwill. The value of real estate, cash, and receivables is not included - a common arrangement in an asset sale of a professional practice.

Other business valuation methods you can use

Even if you need an informal business valuation check for your practice, it is always a good idea to use several valuation methods. No one method is better than the other. The combination gives you a solid coverage and much more reliable estimate of practice worth than a single calculation.

If you plan to share your practice appraisal with other business people, tax authorities or legal experts, a multi-method practice valuation is a must.

For valuing a small owner-operator managed veterinary clinic, consider using the venerable Multiple of Discretionary Earnings method. This income-based valuation technique lets you calculate your practice value based on its earnings and a number of key financial and operational performance factors.

An established clinic may have built up substantial business goodwill. You can calculate the value of goodwill using the Capitalized Excess Earnings method, known as the Treasury Method.

If you are negotiating with professional investors or lenders, the Discounted Cash Flow method should be among your choices. This formal business valuation technique is the common way to determine the value of a professional practice based on its earnings outlook and risk assessment.

Veterinary Practice Valuation using a Set of Methods

Private law practice ownership transfers have been on the rise in recent years. Not surprisingly, the issue of valuing a law firm has gained in importance.

In the US private law firm sales are endorsed by the American Bar Association under the Model Rule 1.17. A growing number of states now permit the sale of a privately owned law practice.

Recent sales of law practices offer you a defensible way to estimate the value of your law firm. Valuation multiples derived from comparable law firm sales are a  common way to value a law practice. Price to gross revenues is the most typical multiple used to assess the practice value.

Law practice goodwill - a large part of practice value

More than many other professional service businesses, private law firms tend to develop considerable goodwill. This is very important since the overall practice value is affected by how transferrable the goodwill is. As in all professional practices, goodwill is actually made up of two parts: the personal goodwill and the practice goodwill.

Law firm value is driven by goodwill tranferrability

The distinction is significant because it is generally much easier to transfer the practice goodwill to the new owners. Personal goodwill, as the name implies, is created by the individual porofessionals.

Client loyalty translates into repeat business for an established law practice. The question is: what happens when the current owner leaves the law firm?

Client retention and earnouts

Client retention is one indication of how well the practice retains its value over time. Private law practice sales often entail earnouts. Under an earnout arrangement, a portion of the law firm’s sale price is held back for a period of time. If the client retention goals are met, the amount held back is paid to the sellers.

Law firm value depends greatly on its size

Market-based valuation multiples vary to a large extent by law firm size. It is not unusual for a law practice grossing over $1,000,000 in annual receipts to command a price to gross revenue valuation multiple greater than 1.5 times.

For smaller firms grossing under $300,000 the valuation multiples rarely exceed 0.5 times the annual revenues. Again, one reason is that the larger law firms tend to do a better job of creating the practice goodwill. In contrast, most of the goodwill in a small law firm is personal in nature.

Hardware stores, classified under SIC 5251 and NAICS 44413, are a sizable part of the retail industry. In the US alone there are over 27,000 hardware stores in operation employing just over 173,000 staff. This retail industry segment generates more than $17 billion in annual gross sales.

Hardware retail business is small business

Yet an average hardware store is typical small business - employing a staff of 6 and producing around $700,000 in annual gross revenues.

These privately owned hardware retail companies are a critical part of the industry: over 95% of hardware stores employ fewer than 25 staff and generate more than $10 billion in annual sales. That is more than 60% of the industry total!

Hardware retail business valuation - market approach

Hardware stores are sold often. If you need to determine the value of a business in this industry, consider using the market-based valuation methods. You can develop a very good idea of what a business is worth by comparison to recent sales of similar private companies.

Valuation multiples derived from hardware store sales are the tools you can apply to value your own business.

For small hardware stores, the typical valuation multiples are these:

• Business sale price to gross revenues or net sales.
• Business sale price to seller’s discretionary cash flow.
• Business sale price to furniture, fixtures and equipment (FF&E) assets.

By convention, the value of business inventory is added to the estimate you get with the above valuation multiples.

Examples - valuing a hardware store using multiples

Let’s consider a typical privately owned hardware retail operation with the following current financials:

• Annual gross sales: $700,000.
• Seller’s discretionary cash flow: $55,000.
• FF&E assets valued at: $70,000.
• Inventory of $225,000.

We pick a reasonable set of valuation multiples for 2009:

• 0.1 times the gross sales.
• 1.4 times the seller’s discretionary cash flow
• 1.5 times the FF&E assets.

Here are the valuation results for this sample business:

• Business value based on gross revenues: $295,000.
• Value based on discretionary cash flow: $302,000.
• Value based on FF&E assets: $330,000.

The average business value is then $309,000.

Hardware store valuation - effect of the economy

Much like the rest of the retail industry, hardware stores are not immune to the economic ups and downs. The business valuation results above give you a reasonable number in the current economic environment.

If we look back in the 2006 - 2007 timeframe, the business valuations were much different. In fact, our example business would be worth around $375,000 at the end of 2007. That’s a differece of some 18%!

Reasons for decline in valuations

This business value change reflects how business people currently see the earnings prospects of small hardware retailers and assess business risk. Business sales require access to large sums of acquisition capital. At the moment that capital is hard to come by.

In addition, business buyers are very careful in assessing the earnings outlook for a business they consider to buy. Having to service a large bank loan or seller’s note against unstable business earnings is not a good recipe for success.

Earnout agreements may be a good option to close a sale - and spread the risk between the business buyer and seller. You set aside a portion of the business selling price that will be paid out to the seller if the business achieves its financial objectives in the future.

For example, 50% of the contract purchase price may be held back for a year. The business seller gets this money if the revenue targets, above a baseline minimum, are reached then.

Business Valuation based on Sale Comps, Assets and Income

Do you own a small pest control company? Perhaps plan to buy one? In either case, knowing what the business is worth is essential.

Privately owned pest control firms, classified under the SIC code 7342 and NAICS 56171, are a common service business. Established companies in this industry, especially those with a track record of positive earnings, are a frequent acquisition target.

Large number of pest control business sales = reliable valuation multiples

This is good news indeed. Recent business sales of pest control companies offer you an excellent way to estimate the value of your company. The typical method is to use the valuation multiples derived from recent sales of comparable pest control businesses.

You can come up with a very comprehensive estimate of your business value by applying these valuation multiples to your business financials. Here is the list of the typical multiples used for pest control business valuation:

• Business price to gross revenues or net sales.
• Business price to gross profit.
• Business price to net income.
• Business price to EBIT and EBITDA earnings.
• Business price to Seller’s discretionary cash flow (SDCF).
• Business price to Furniture, Fixtures and Equipment (FF&E) Assets.
• Business price to total business assets.

Picking the valuation multiples that best reflect your company’s value drivers

Using a number of valuation multiples at once can tell you quite a bit about the key value drivers for your company. For example, established, highly profitable businesses are best valued using the earnings-based valuation multiples.

In fact, the business value spread is the smallest if you use the Price to Net Income multiples. This means that the business buyers and sellers tend to rely on the pest control company’s profitability as the preferred basis for business valuation in order to support the asking or offer price.

On the other hand, a young company may be showing good revenue but profits that lag behind the industry norm. In this case, the price to gross revenue valuation multiple is a better choice to demonstrate the business value.

Price to FF&E assets is another choice to value a company that has invested heavily in equipment, business automation and management systems.

Example - using valuation multiples to estimate the value of a small pest control company.

Let’s consider a typical small pest control business with the following current financials:

• Gross annual revenue: $650,000.
• Net Sales: $600,000.
• Net Income: $50,000.
• EBITDA: 65,000.
• Seller’s discretionary cash flow: 140,000.
• FF&E Assets: $350,000.
• Inventory: $80,000.

To calculate the fair market value of the business for this example, we pick these valuation multiples:

• Price to gross revenue: 0.7.
• Price to net sales: 0.76.
• Price to net income: 10.5.
• Price to EBITDA: 8.25.
• Price to SDCF: 3.2
• Price to FF&E assets: 1.4

Your business financials X valuation multiples = business value

Our estimates of the business value are as follows:

• Based on gross revenues: $535,000.
• Based on net sales: $456,000.
• Based on net income: $546,000.
• Based on EBITDA: $536,250.
• Based on SDCF: $528,000.
• Based on FF&E assets: $570,000.

Note that, by convention, the market value of business inventory is added to the value estimates based on gross revenues, SDCF and FF&E assets. When doing your own business valuation be sure to adjust your inventory levels to what is good and saleable. Remove the inventory that is obsolete, damaged or lost.

You can use the business value estimates from above to come up with the value range or a single average number:

Business value range: $456,000 - $570,000.

Average business value: $528,542.

Incidentally, either way of concluding the business value is endorsed by the recent AICPA SSVS No 1 business appraisal standard.

Classified under the SIC 5719 code, home furnishings stores are a major segment of the retail industry. If you need to value such a business, you have a choice of well-known methods to get the job done.

Perhaps the best known approach to valuing a home furnishings company is by comparison to recent sales of similar businesses. Using the actual business selling prices and financial performance parameters of such businesses, you can come up with valuation multiples to estimate what your business is worth.

Valuation multiples typically used to value home furnishings stores

Here is our list, starting with the most accurate valuation multiple:

• Business sale price to gross profit.
• Price to net sales.
• Price to EBITDA.
• Price to EBIT.
• Price to net income.
• Price to total business assets.

Since all valuation multiples are statistically calculated from a number of comparable business sales, the accuracy of each multiple depends on its spread. A tighter spread means that you can predict your business value with greater accuracy using the multiple.

Example - using a number of valuation multiples to estimate the business value

We will consider a typical privately owned home furnishings company generating $1,000,000 in net sales, $500,000 in gross profits, $75,000 in EBITDA; $50,000 in EBIT; $45,000 in net income and $220,000 in total assets.

We pick a set of reasonable valuation multiples to do our estimation:

• 0.7 times the gross profit.
• 0.4 times the business net sales.
• 5.6 times the EBITDA.
• 5.8 times the EBIT.
• 6.2 times the net income.
• 1.5 times the total assets.

Note that our valuation multiples include an estimated $100,000 in inventory.

Applying the multiples to the business financial performance numbers gives us the following set of business fair market value estimates:

• Business value based on gross profit: $350,000.
• Based on net annual sales: $400,000.
• Based on EBITDA: $420,000.
• Based on EBIT: $290,000.
• Based on net income: $279,000.
• Based on total business assets: $330,000.

Averaging all these estimates gives us the combined business market value of $344,833. As is typical under the market business valuation approach, this value figure covers the business tangible assets and goodwill. The values of business owned real estate, non-operating assets, cash and accounts receivable are extra.

Other business valuation methods for home furnishings retail stores

If you want your business valuation results to be taken seriously, consider using a number of income and asset-based valuation methods as well.  This gives you two more ways to assess what your business is worth - based on its earning capacity, risk and asset base.

For owner-operator managed home furnishings businesses, the Multiple of Discretionary Earnings method is a highly recommended choice. In addition to business discretionary earnings, this method lets you determine your business value based on the assessment of 14 key financial, operational and marketing performance factors.

If your company has a long track record of success in its market place, the value of business goodwill can be a big part of the total business value. Consider using the well-known Treasury Method in your business appraisal - an established way to value a business as a sum of its tangible assets and business goodwill.

Valuing a Business Three Ways

Catering companies are a major segment of the food and drink industry, classified under SIC 5812 and NAICS 72232. Successful catering businesses sell quite often. This is good news if you need to determine the fair market value of your company. 

In fact, valuation multiples derived from recent sales of similar firms give you an accurate and highly defensible way to estimate what your business is worth.

For a catering business, the most commonly used valuation multiples are these:

• Business sale price to gross annual revenues.
• Business sale price to furniture, fixture and equipment (FF&E) assets.
• Business sale price to seller’s discretionary cash flow.

Typically, the value of business inventory is added to the value estimates.

We have listed these valuation multiples in the order of their accuracy. Since the multiples are statistically derived from a number of business sales, a key measure of their accuracy is the value spread. The closer the actual valuation multiples to each other, the more accurately you can predict your own business value.

Indeed, the business price to gross revenue valuation multiple shows a spread that is about 45% tighter than the discretionary cash flow based estimates.

Example - using valuation multiples to estimate the value of a catering business.

Consider a typical catering company that generates $500,000 in annual gross sales, owns $100,000 in fixed assets, carries $10,000 in inventory and throws off $120,000 in discretionary cash flow. To calculate the business value, we pick a set of reasonable valuation multiples as follows:

• 40% of gross revenues.
• 2.5 times the value of furniture, fixtures and equipment.
• 1.8 times the seller’s discretionary cash flow.

This gives us the following business value estimates, including the inventory:

• Based on business gross revenues: $210,000.
• Based on FF&E business assets: $260,000.
• Based on seller’s discretionary cash flow: $226,000.

Taking the average of the above numbers gives the likely business market value of $232,000.

Can your business sell for a higher price?

Each business is unique. In addition, the circumstances of each business sale are different. Hence, it is quite possible that your business can be worth more or less on the market. Some key factors that affect the business market value:

• Availability of financing, especially seller financing. All-cash deals tend to fetch lower prices than financed business sales.
• Specific motivations of the business buyer and seller. It is hard to get a fair market value for the business whose owners are compelled to sell.
• Timing and effectiveness of the business for sale marketing effort. The more qualified buyers are interested in your business, the higher the likely selling price.

If you are considering a dental practice appraisal, here are some interesting industry statistics:

There are over 147,000 privately owned dental practices in the US alone, classified under the SIC 8021. Dental practices are a large part of health services and generate around $44.6B in annual revenues. Yet an average dental practice is a small service business - employing a staff of 6 and producing some $300,000 in annual sales.

Dental practice valuation methods - market comps

Practice sales are a frequent occurrence so there are plenty of comparable data to use for valuing a dental practice. There are a number of valuation multiples to choose from, each giving you a different way to determine the practice value. Here are the top ones, in the order of accuracy:

• Practice sale price to gross profit.
• Sale price to total invested capital.
• Practice sale price to net sales.
• Sale price to discretionary cash flow.

The lineup may be surprising to some - a traditional way to assess a dental practice value has relied upon the net sales or gross annual revenues. However, the market for dental practices is quite dynamic and pricing trends change over time.

We pay close attention to the spread of actual practice selling prices around the average. The measure of this is the coefficient of variation - the smaller this number the tighter the selling prices cluster around the mean. If you want to estimate your practice value, use the valuation multiples with the smallest coefficient of variation first.

Recent dental practice sales data show that the gross profit based valuation multiples can give you the most accurate estimate of current practice value. In fact, its coefficient of variation is just 0.39 compared to 2.39 for the net sales based multiple.

Example: Using dental practice valuation multiples

Consider an average private dental practice generating $300,000 in annual net sales, having a gross profit of $275,000; discretionary cash flow of $100,000; and total invested capital, which includes practice total assets and long-term liabilities, of $85,000.

Let’s take reasonable values of the respective valuation multiples for use in our value calculations:

• Sale price to gross profit: 0.7.
• Sale price to total invested capital: 2.
• Sale price to net sales: 0.6.
• Sale price to discretionary cash flow: 1.7.

Applying these valuation multiples gives us the following practice value estimates:

• Based on gross profit: $192,500.
• Based on total invested capital: $170,000.
• Based on net sales: $180,000.
• Based on discretionary cash flow: $170,000.

This gives us the average practice value of $178,125.

As is typical with professional practice appraisals, this value includes all tangible assets and practice goodwill. It does not include cash, accounts receivable, liabilities or real estate. The value of earnouts, if present, is also excluded.

Other methods for dental practice valuation

As in other health care practice valuations, the value of a dental practice is driven by its earning capacity. You can use a number of income based valuation methods to determine what your practice is worth. Both Multiple of Discretionary Earnings and Discounted Cash Flow methods are frequent choices in dental practice appraisals.

For an established practice, consider using the Capitalized Excess Earnings method that lets you estimate the value of practice goodwill. This may well make up a large part of the overall practice value.

The number of business valuations involving private law practices has grown steadily in recent years. The two main types of situations calling for a law firm appraisal are these:

• Transactional such as the law practice sale, merger or spin-off.
• Legal controversy. The most common reason is divorce followed by partner disputes.

Given the rising volume of law firm valuations you may wonder: what are the methods best suited for private law practice appraisal?

Methods for law practice appraisal

Law firms are a prominent example of professional service companies. Given the relatively low levels of hard assets in a typical law practice, most valuations are generally done using a combination of market and income-based appraisal methods.

For smaller privately owned and operated law practices you can do market value comparisons based on the recent law practice selling prices. Such comparisons usually rely upon the valuation multiples that are based on the firm’s gross revenues.

This value assessment is then complemented by the income analysis using the well-known Multiple of Discretionary Earnings business valuation method.

For larger law firms, the preferred income-based valuation method is Discounted Cash Flow. This valuation technique focuses on the law practice cash flow given the acceptable level of investment risk which is represented by the discount rate.

This combination of the comparative market value analysis and discounted cash flow valuation is known as the First Chicago Method.

Law practice goodwill valuation

For established law firms the value of business goodwill may be a sizeable part of the overall practice value. Consider using the highly respected Capitalized Excess Earnings method, also known as the Treasury Method. You can calculate the law practice goodwill based on the so-called excess earnings - those in excess of the fair return on the capital committed.

Market-based business valuation techniques are often used to value professional architecture firms. Many business sales in this professional services industry are brokered by skilled intermediaries. As a result, there are reliable business sale comparables data to value your architectural services company.

While you have a number of valuation multiples for business value estimation, some are more accurate than others when it comes to valuing the architecture firms.

Top valuation multiples for architecture firm appraisals

Our ranking of valuation multiples is based on the coefficient of variation that indicates the spread of business valuation multiples around the average. The smaller the coefficient, the smaller the spread of business value estimates you get.

Here is our list of valuation multiples arranged in the order of their accuracy:

1. Business selling price to gross revenues or net sales.
2. Price to EBITDA.
3. Business sale price to EBIT.
4. Business sale price to Net Income.
5. Business sale price to total business assets.
6. Price to the book value of equity.

The first valuation multiple is the typical one used for pricing an architectural company for sale.

The coefficient of variation for the net sales-based valuation multiple is just under 0.5 which is 2.5 times less than the equity-based number. What this means is that most architecture firm sales are actually priced using the company net sales or EBITDA as the valuation basis.

Setting the right asking price for your business can make a big difference to the successful sale outcome and the time it takes to sell the company. While the average days on market is around 470 days, it can take over 2 years to sell an architecture firm.

Example - business valuation of an architecture firm using the multiples

Let’s consider a typical firm grossing around $600,000 in net sales and generating $200,000 in EBITDA profits in the most recent year.

Using the typical valuation multiples of 0.5 times the net sales and 2 times the EBITDA, gives us the following estimates of business value for the firm:

• Business value based on net sales: $300,000.
• Business value based on EBITDA:    $400,000.

One way to reconcile the difference is to average the two results above. Applying the weights based on the accuracy of each value estimate, we get:

$300,000 x 0.52 + $400,000 x 0.48 =  $348,414

The business value estimate covers the tangible assets, goodwill and other valuable intangibles such as client lists. Cash, receivables and company owned real estate are usually not included.

If you are valuing a CPA practice, consider using the tried and true tools - valuation multiples derived from the sales of comparable accounting practices.

The advantage of taking this market approach to an accounting practice valuation is twofold:

1. It offers highly defensible evidence of the current selling prices for CPA practices.
2. It captures the risk including the important industry and firm size risk premia as well as the discount for lack of marketability.

Top valuation multiples used for CPA practice appraisals

While there are a number of economic and accounting bases you can use to estimate the CPA practice market value, most acquisitions are priced using just a few valuation multiples:

• Selling price to gross revenues or net sales.
• Price to EBIT, EBITDA or discretionary cash flow.

The first valuation multiples are by far the most common ones. In fact, the coefficient of variation for the Price to Net Sales valuation multiples is just under 0.27 which is less than 10% that of the EBIT based number.

This indicates that the variation of the CPA practice selling prices around the mean is much smaller when the net sales basis is used. Put differently, your peers tend to trust the revenues a lot more as the basis of pricing an accounting practice acquisition.

Earnouts are a frequent element of the CPA practice purchase deal structure. This is especially so for firms that tend to rely on tax preparation as the main source of income.

A typical hold-back period is one year but can be shorter for accounting firms with substantial value-added services to help smooth out the hectic tax preparation season - and the practice’s income stream.

Example - CPA practice value estimation using multiples

Consider a practice generating $500,000 in annual client billings. A reasonable current valuation multiple is 1 times the revenues. This gives us the business market value for the practice of $500,000.

By convention, the value estimate includes the practice tangible assets, goodwill and other valuable intangibles such as the client lists. Liquid assets and practice owned real estate are extra.

Other methods for CPA practice appraisal

If you are handling the valuation of a small accounting practice, consider the Multiple of Discretionary Earnings business valuation method. A well-known variant of the direct capitalization valuation methods under the income approach, this technique is an excellent way to value a private accounting firm based on its earning power and a number of key financial and operational performance factors.

Business goodwill can be a large portion of the overall CPA practice value. The Capitalized Excess Earnings valuation method is a proven way to determine the value of practice goodwill. Known as the Treasury method, it has been described in the Internal Revenue Service Ruling 59-60 and 68-609.