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.

Whether you are valuing a business by yourself or engage a professional business appraiser, a business appraisal report is a typical work product you get.

Such a report does more than summarize the business valuation results - it clearly defines what business ownership interests are being valued. Importantly, it also shows the key assumptions and judgement calls made by the business appraiser.

Now, as a busy business person you may be tempted just to glance at the business valuation result, decide if it is reasonable, then file the report.

Nothing wrong with that, but there is more to be gained from a well-prepared business appraisal report. If you plan to share your business appraisal with others, it is likely they will have questions about your conclusions. On occasion, they may even challenge your business valuation results.

The reasons any business appraisal can be questioned

Business appraisal deals with the business’s future economic prospects. This necessarily requires that you make a number of assumptions. And these assumptions mean that you, or the business valuation expert you hire, make educated judgement calls in order to reach the business value conclusion.

Needless to say, the reader of your business appraisal report may disagree with some of the assumptions contained in the report.

• Are the business sale comparables really comparative to your business? 
• How realistic is your projection of the future business income?
• Have all the elements been considered when assessing the company risk?
• Why were these business valuation methods, and not others, chosen to calculate business value?

Typical business appraisal accuracy

Even the most thorough business appraisal will depend for its accuracy on some “leaps of faith” that will affect the final business valuation outcome. So two equally skilled business appraisers will likely come up with different valuation results.

How different? It is not unusual to see a difference of around 20% - 25% between professionally done business appraisals of the same company. In fact, an increasingly common practice in business appraisals is to report the result as a range of business values.

Business appraisal results are useful - if you can defend your assumptions

So if you meet with a healthy dose of skepticism when sharing your business appraisal results with others, you will appreciate why your business appraisal report contains more than just a number.

To use your business appraisal results effectively, spend a bit of time to understand and be prepared to defend the assumptions that drive your business value conclusions.

What’s in a Business Appraisal Report?

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.

Ask a professional business appraiser about how to value a business and
you will hear that there are three ways or approaches to measuring the business worth:

1. Market - based on comparison to similar business sales.
2. Asset - which looks at the values of business assets and liabilities.
3. Income - where you determine what a business is worth based on its income and risk.

The good thing is that you can value any business using these approaches, regardless of the company’s current financial performance.

Put differently, a business that is not profitable at the moment, may still have considerable economic value, and be worth quite a bit of money.

Business value depends on the long-term earnings outlook

Remember that all business valuations are forward looking - your business value is defined by the future business prospects. And there is a number of things business people can do that affect their business worth. For example:

Business owners may decide to merge businesses that lose money. The combined company may enjoy advantages that drive profitability: better product bundling, access to new markets, lower costs due to economies of scale from combined operations, and much more.

A business can attract smart investors that bring not just money but considerable managerial skills to the table. This may help the company develop new products and services, enter new markets, and turn its technology and know-how to profitable use.

Over time, the company owners may introduce operational changes that cut costs and improve efficiency. Long-term employees are often an excellent source of ideas - and how to implement them to contribute to the bottom line.

Putting the business up for sale

Of course, the company owners may decide to sell the business. Can an unprofitable business sell? Yes - provided the right type of business buyer is found. Some typical types:

Financial business buyers

Typically savvy investors that focus on low-cost income streams. They tend to look for low-debt, highly profitable companies.

Synergistic business buyers

These may be a group of investors or a larger company looking to grow through acquisitions. Such buyers may well be interested in the acquired company’s longer-term potential beyond its immediate profit numbers.

Business valuation models and methods for unprofitable businesses

Market comparisons to similar established companies are an excellent way to estimate what your business is worth. You have quite a choice of standard valuation multiples that relate the business potential selling price to its financial fundamentals.

Valuation multiple choices that work well

For an unprofitable company, the following valuation multiples are especially useful:

• Business selling price to gross revenues or net sales.
• Business selling price to business assets, such as total assets or tangible assets.
• Business selling price to book or market value of business equity.

If you plan to re-capitalize the business or sell it to a well-funded buyer, the valuation multiples based on business revenues or asset base are very useful. Selling price to total assets is especially well suited for valuing a business
that has both tangible and intangible assets, such as intellectual property, customer lists, valuable distribution rights, and the like.

The valuation multiples based on profitability, such as discretionary cash flow, EBITDA, or net income, will likely paint an unfavorable picture of what the business is worth.

Business valuation based on future income

Income based business valuation methods, such as the Discounted Cash Flow, are very well suited for valuing a business that currently runs at a loss.

This well-known method lets you calculate business value based on the company’s earnings forecast and risk assessment. Typical forecasts are done for 5 years, followed by the estimate of the business long-term (terminal) value.

Valuing a Business based on Cash Flow and Risk

Asset based business valuation methods

You can also use asset business valuation methods, such as asset accumulation or capitalized excess earnings. A well-established company may command considerable goodwill, despite the current slide in profitability. To calculate business goodwill, you will need to use the earnings estimate that represents the long-term business earning potential.

Your business valuation model may include a number of methods to determine what the business is worth. This multi-faceted approach is typical of professionally done business appraisals and tends to produce accurate, defensible results.

Business Valuation three Ways

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.

If you are looking to sell your small business or plan to buy one, the central question is what the business is worth on the market.

Overprice your business, and you will see little buyer interest. If your asking price is too low, you risk leaving a lot of money on the table. Knowing the market value of your business helps you set the asking price that attracts qualified buyers - and results in a successful business sale.

Equally, if you want your offer to be taken seriously by the business seller, your price must reflect the realities of the business market place.

Beyond business acquisitions, business market value is key to establishing the business worth in a number of important situations - in legal disputes, business partner buyout situations, and in dealing with the tax authorities.

A solid evidence of what the business is likely to sell for if put on the market is often the most convincing proof of its value.

And there is no better way to estimate the likely business selling price than comparing it to the actual sales of similar private businesses.

Private business sales are very different from sales of public companies

Be careful looking at the sales of publicly traded companies when estimating the value of a private business. Valuation multiples for public companies are likely to be very different than those you get form private business sales.

Here are the top three reasons for this:

1. Small private businesses are less marketable than large public firms.
2. Small business sales are done on the controlling ownership basis. Most public company stock sales are non-controlling.
3. Small businesses are more risky and their valuation multiples reflect that.

Small businesses are less marketable than big company stock

If you own shares in a large publicly traded company, you can sell them within minutes by placing a market order through your broker. And you can get your money the next business day. More importantly, your actual selling price and the market price per share just before the sale are likely to be very close.

In contrast, selling a small privately owned business is a lengthy and uncertain proposition. Small businesses take 6 to 9 months to sell on average. Finding the right buyer, negotiating and closing the sale cost time, money and effort. And there is no certainty that your actual business selling price will be close to the asking price.

In formal terms, small businesses are illiquid investments, unlike shares of stock in pubicly traded companies, which are highly marketable.

This lack of marketability of small business ownership interest leads to significant discounts being applied by investors, such as financial business buyers. In other words, the buyers want to be compensated for taking the risk - and they do so by lowering the price they are willing to pay for a private business.

Valuation multiples you get by comparison to small business sales reflect this risk. Public company share price ratios do not.

Small business vs big business: what sells?

Most investors in public companies trade a small number of shares. When a large company is acquired, the buyer typically pays a premium for getting a controlling stake in the business. It is not unusual to see the control premium in the 50% - 80% over the market price of the company’s shares.

Almost all private business sales are done on the controlling ownership basis - the entire business sells. If you were to use the price per share numbers based on the public company data, you could be 80% wrong!

Again, valuation multiples derived from sales of similar small businesses are based on sales of the entire business. This is not the case for public company data.

Small businesses are more risky

For a proof of this take a look at the stock market to see that small firms tend to generate higher returns than, say, Fortune 500 companies. Put differently, investors use lower valuation multiples when pricing shares of smaller companies.

Best way to estimate business market value?

For accurate estimate of your business market value, you should use valuation multiples derived from the actual sales of similar small businesses. These businesses operate in the same industry, are privately owned, and are about the same size as your company.

Make relevant comparisons!

Such ”apples to apples” comparisons can give you a very reliable estimate of your what your business is worth on the market.

Business Market Value based on Small Business Sales

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 need reliable industry valuation multiples for your business - look no further. ValuAdder Business Market Value Reports give you over 40 valuation multiples derived from the latest private business sales in your industry.

40 valuation multiples to assess your business market value

Custom-compiled to your specifications, each Business Market Value Report features over 40 valuation multiples derived from the sales of similar private businesses. Your Report gives you a comprehensive assessment of what the business is worth on the market based on the key financial parameters:

• Gross revenues and net sales.
• Gross profit.
• Net income.
• EBIT and EBITDA.
• Discretionary cash flow.
• Business asset base, including inventory levels.
• Book value of sold businesses.

See how the successful acquisition deals are put together

If you are planning to sell your business or make an offer to buy one, your Report offers strategic answers to these key questions:

• What were the selling prices for businesses like yours? 
• How are the successful business acquisitions structured?
• How do the asking prices compare to the actual business selling prices?
• How long does it take to sell a business in your industry?

Actual private business sales reported by business brokers

These business sales have been reported across more than 700 industries by professional business brokers closing successful deals. In addition, a number of transactions represent private business acquisitions by public companies.

Back your critical decisions by data from the two renowned databases trusted by the business appraisal professionals and brokers everywhere.

See sample Business Market Value Report!

There are no better indicators of what a business is worth than its earning prospects and risk profile. Savvy investors analyze business opportunities by doing careful forecast of their income. But forecasts and money in the bank do differ in one key respect - there is a risk that the business may not live up to your expectations.

Hence, business value depends upon its risk assessment. Well-known income-based business valuation methods, such as the Discounted Cash Flow, let you account for the business risk directly - via the appropriate discount rate.

Alternatively, you can use the capitalization rate to factor in the company risk when valuing a business. The direct capitalization business valuation methods, for example the powerful the Multiple of Discretionary Earnings, let you do just that.

Since the discount and cap rates are related via the business growth rate, you can use both business valuation techniques.

Given the importance of company risk assessment via the discount and cap rates, how do you determine these important factors?

Do they depend on the economic conditions? Also, do the discount and cap rates change over time?

Each company has its own risk profile. Not surprisingly, the discount and capitalization rates for each business will differ. Here is how the discount rate is determined using the famous Build-Up formula:

1. Start with a risk-free return.
2. Add a risk premium for equity investment.
3. Add another risk premium for small company size.
4. Add a risk premum for the industry the company operates in.
5. Finally, add the company-specific risk premium.

Risk-free investments do pay!

Risk-free return means no risk of default. Investors like to use the current yields on long-term government debt obligations, such as the US Treasury bonds, as a measure of the current risk-free rate of return.

Even the most diversified stock investment portfolio is risky

You can examine the prevailing rates of return across the stock market to determine the additional returns the investors get for putting their money into publicly traded companies. This additional return is the premium required to keep investors interested in these companies, given their risk.

Small companies are riskier still

Small firms are seen as more risky than large ones. Again, you can study the market to see that the so-called “small cap” companies tend to generate higher returns. The additional return is the company size risk premium that can be used in the Build-Up formula.

Business risk varies by industry

Each industry has a set of unique risks that companies must overcome to be successful. You can study the returns in the specific industry in comparison to the stock performance across the entire market. The difference in the returns is the industry risk premium. Note that this number can be negative - if the industry is seen as less risky than the market as a whole.

Each company has its own risks

No company risk assessment is complete without analyzing its own set of strengths and weaknesses. Decisions made by the company management such as financial leverage, entering and exiting certain markets, hiring skilled staff, and making critical investments affect the company’s income prospects and its risk. Your goal here is to assess how these factors translate into the company-specific risk premium number.

Your business risk changes over time - so does business value

If you glance at the Build-Up formula elements, it is clear that the overall discount rate will vary over time.

Risk-free returns vary based on the prevailing interest rate climate. Public company fortunes change, so do their returns. Small companies may become a haven for investment money in some markets.

Industries go through cycles of expansion and contraction. And, of course, strategic decisions in the company itself affect its own risk.

It is a good idea to revise your risk assessment at least annually. This helps smooth over any transient effects in the markets and lets you spot important trends.

Tools to calculate the discount and cap rates

ValuAdder 4.0 business valuation software contains several tools you can use to assess the risk of any company.

Using the latest market data, ValuAdder financial recasting worksheets let you build up your discount rate, calculate your capitalization rate and account for the various business financing scenarios - with different costs of debt and equity capital. 

Business Valuation Tools

Any business appraisal, whether prepared by you or someone else, depends on the assumptions made at the outset. Take a look at a well-prepared business appraisal report and you will see that, how the business value is measured as well as the circumstances of business appraisal, are clearly spelled out.

In addition, assessment of business worth requires informed judgement calls from the author - whether the business person or professional appraiser. How you view the business income generation prospects and translate them into the financial forecast makes a difference to the calculated business value result.

Business risk estimation, subject to your judgement, shows up as some pretty important numbers in the form of discount and capitalization rates. These, in turn, affect the outcome of your business valuation calculations.

So, it is not surprising that two appraisals of the same business may give you different results. How different? It is not unusual to see variations on the order of 20 - 25%. Put another way, a well-done business appraisal really establishes business worth within a range of values, not a single number, down to a penny.

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.

If you plan to acquire a small business, a central question is what the business is worth. Business valuation is the key step to determine your offer price and terms.

Business value: what happens after you buy?

In addition, understanding the target business economic value is essential to address some strategic questions after the purchase:

1. Which business value drivers are important?
2. What can you do to continue increasing business value?

Knowing what creates business value helps you focus your precious resources on things that matter most to your business worth. Smart allocation of resources is what sets apart successful business acquisitions from failures.

Approaches and methods to valuing a business for sale

Regardless of your acquisition target, you have 3 ways to determine the value of a business:

1. Market approach.
2. Asset approach.
3. Income approach.

Business Valuation using Three Approaches

To get a reliable, accurate appraisal of business value you should use several methods under each of these key valuation approaches. This strategy is adopted in all professionally prepared business appraisals. The reason is that no one business valuation method is better then the others. Each approach lets you see the business against the background of important economic considerations.

Market based business valuation methods let you compare the target business against similar businesses that sold recently. Needless to say, this is a very compelling way to estimate your offer price!

Asset-based business appraisal methods, such as Capitalized Excess Earnings, help you determine whether the costs of buying the business are consistent with its true economic value. Should you pay the business seller’s price or build a similar business - and save?

Finally, the income-based business valuation methods, such as Multiple of Discretionary Earnings, let you look at the core of business value - its earning capacity and risk. The power of income based business valuation is that you can determine what the business is worth based on your specific business ownership objectives.

Structuring a business acquisition deal – cash is king!

Detemining the business value is one important step toward a successful business acquisition. To ensure that your business purchase works you need to structure the terms of your offer. The important questions your offer terms must address are:

• Does the business throw off sufficient cash flow to cover all my financial needs?
• Can the business service debt without difficulty?
• Is there enough cash to fund important capital expenses going forward?
• When do you get your down payment money back?

Structuing Your Business Acquisition

Debt service - margin of safety

The focus in your deal structuring analysis is on the business available cash flow. If you plan to fund the business acquisition with debt, whether from a lender or using seller financing, adequate debt service coverage is critical to your success. A key funding criterion by commercial lenders is debt service coverage ratio of at least 1.25.

Project costs - more than the business purchase price

Most small business acquisitions are so-called asset purchases. This means that you must account not just for the purchase price but provide for adequate working capital as well. You total outlay will also include the transaction costs of buying the business. The sum total of these three elements is your business acquisition project cost - which may exceed the contract purchase price by a hefty amount!

Can the busines pay the working owners?

Make sure that the business acquisition gives you a living wage. If a bank loan is involved in deal financing, your banker will certainly check if the business cash flow supports adequate salary for all new business owners.

Cash flow drain: deferred maintenance and equipment replacement

One key mistake to avoid is failing to allocate enough funds for new equipment purchases and other capital investments. You need to check the condition of business equipment and other hard assets and determine if they need to be replaced or upgraded in the near future. Unexpected capital expenditures can wreak havoc with your business finances!

Return of your investment

Smart business buyers and investors always want to see a return of their down payment. Make sure that business cash flow allows you to recover your investment within as short a period as possible.

As with successful business ownership, in business acquisition the golden rule is: cash is king!

When it comes to valuing a partner’s stake in the business, valuation of the business as a whole is the first step. The next big question is how to allocate this business value among the partners.

You may think that that the total business enterprise value should be divided in proportion to the partners ownership interests. Let’s say there are two partners, one owns 75% of the business and the other the remaining 25%. The overall business is worth $1,000,000. In the pro-rata allocation scenario, the first partner’s business ownership stake is worth $750,000 while the second partner has a claim on $250,000.

Control premia and minority ownership discounts

There are significant differences in the actual value of the two partnership interests though. The first partner, who owns the so-called controlling interest in the company, has a lot more say on how the critical decisions are made, including:

• Timing and size of dividend payouts or partnership draws.
• Hiring decisions.
• Acquisitions and sale of business assets.
• Raising equity and debt capital for business growth. 

As a result, such controlling business ownership interest comes at a premium, quite often a significant one. You can watch the market for publicly traded company securities to see that. An acquiror making a bid for a controlling block of shares in a company tends to offer a price per share that exceeds the market price. 

Translating the control premium to minority discount

If you study the control premia offered, you can also deduce the minority discounts that apply to non-controlling business ownership interests. In fact, the minority discount can be calculated directly from the control premium as follows:

Here P stands for the control premum, expressed as a ratio, and M is the minority discount.

Example

Suppose that a group of investors wants to buy a 75% stake in a company. Current price per share of company stock is $10. The investors offer $15 per share. This means that the investors are ready to pay a 50% premium to get the controlling 75% ownership of the company.

Using the formula above, we can calculate how much minority discount applies to a non-controlling partner’s share who owns the remaining 25% of the business.

In this case M = 33.33%. In other words, each share of company stock held by the minority partner is worth 2/3 of a share held by the investors who own 75% of the company.

Valuing a partner’s business ownership stake for buy-out

In partner buy-outs, you can determine the value of a business ownership interest in three steps:

1. First, calculate the total business enterprise value.
2. Next, determine the pro-rata share based on the ownership split.
3. Finally, apply the minority discount to establish the worth of the partner’s business ownership interest.

Using our earlier example, let’s say that the partner who owns 25% of the company wishes to depart. The total business value of $1,000,000 is divided into two pro-rata pots of $750,000 and $250,000. Applying the 33.33% minority discount to $250,000 gives the value of $166,675.

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

We talked about the factors that create personal goodwill in small businesses and professional practices. The key takeaway is that personal goodwill is associated with the individual practitioner, not the business organization.

In contrast, institutional business goodwill arises from the business or practice itself. This is the type of goodwill that you can transfer easily when the business or a partner’s share sell.

Increase total business value by building the institutional business goodwill

One value-enhancing strategy you can follow is to make sure that the large part of goodwill is created by the business or practice itself. This is known as the institutional goodwill. So which factors indicate this important type of business goodwill? Here is the list:

Top 8 factors that create institutional business goodwill

1. Quality and skill of employees.
2. Business reputation.
3. Business name recognition.
4. Competitive postion of the business or professional practice in its market place.
5. Location of the business premises.
6. Business referral base.
7. Stability of earnings.
8. Business marketability.

How the 8 factors affect the value of business goodwill

It goes without saying that skilled, long-term staff is the major asset in any business or professional practice. If such employees remain with the practice after key partners depart, the new owners acquire the considerable benefit of trained and assembled workforce. The result? A higher value of business goodwill and the entire business enterprise.

Focusing on building the reputation and name recognition of the business tends to attract loyal customer following. The clients come to respect and prefer the company as the product and service provider. Needless to say, this translates into higher earning potential - and higher business goodwill.

If your business or professional practice has built up a set of sustained competitive advantages, it probably enjoys superior earnings - through lower costs and greater pricing flexibility. Above average earnings are a key element in creating business goodwill over the long term.

Excellent location makes the business more visible and accessible to its target market. The result is often strong repeat and referral business. Good location also tends to help reduce the marketing expenses.

You need to understand if new client referrals come because of the business reputation, rather than an individual practitioner. Should the expert depart, the clients will likely keep coming. Such client retention is the major contributor to the business goodwill.

Stable business earnings indicate the staying power of the business or professional practice. Business people pay attention to historic earnings stability to predict what is likely to happen in the future. Again, this future earnings outlook indicates how valuable the business is.

If you find a strong market for existing businesses in some industry, buyer competition tends to increase business selling prices. Remember that the value of business goodwill is the difference between the total business value and the appraised value of its assets. Hence, strong competition among the buyers - and higher business selling prices - point to higher value of business goodwill.

Calculation of Business Goodwill

Business goodwill valuation comes up often in the context of valuing professional practices and consulting service businesses. The typical examples are medical, dental and other healthcare practices, CPA and law firms, engineering and architecture consulting businesses and other professional service companies.

A key question you may need to address is how much of the practice or business goodwill can be transferred to new ownership. In addition, legal dispute situations generally require that practice goodwill value be included in your business valuation.

Business goodwill sources: business or personal?

An important challenge you may face is how to distinguish between the business goodwill and professional goodwill. Business goodwill is created by the business or practice itself. On the other hand, professional goodwill is personal in nature - it is associated with the individual professional practitioners.

This important distinction is important because it is generally much easiler to transfer goodwill that is associated with the business, rather than individual professional practitioner.

Elements of professional goodwill

You may need to separate the professional from business goodwill in many practice valuation situations. Here are the key elements that help you identify the professional goodwill:

• Practitioner skill and ability.
• Professional judgement.
• Practitioner age and health.
• Professional’s reputation and name recognition.
• Fee schedule commanded by the individual professional.
• Personal referral base.
• Level of client involvement.
• Work habits.

High levels of specialized skill, demonstrated ability and excellent professional judgement are strong indicators of professional goodwill. Clients tend to trust professionals that are skilled and make correct decisions.

Professionals that are in good health and have a long career horizon have excellent earnings outlook - a major element of continued professional goodwill.

A professional who is respected by peers and clients tends to be successful and enjoys excellent earning potential.

In addition, the fee schedule indicates how well the professional can translate the skill and reputation advantages into superior earnings, and greater professional goodwill.

Clients are a lifeblood of any professional practice or service business. The practitioner who has a steady, high quality referral base creates a considerable level of professional goodwill. Answer this question: do the referrals occur because of the business or individual professional’s reputation? The greater the level of professional’s involvement with the clients, the greater professional goodwill.

While it is common knowledge that professionals work long hours, how well you allocate your time among the various tasks can make a big difference to your earnings.

Predictably, professional goodwill increases as the practitioner dedicates more time to the highest value-creating tasks.

Business and Practice Goodwill Valuation

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 are looking to have a business appraised hiring an appraiser is one of the ways to do it. As with any professional engagement the question of costs comes up rather quickly.

Not surprisingly, professionally prepared appraisals don’t come cheap; the average hourly rates these days are around $300. A well-done business appraisal takes about 20 hours or more. Do the math, and the price tag runs to $6,000 and up.

That’s not including any extra consulting time to present the business appraisal to partners, other professionals, prospective buyers, sellers or investors.

Instant business appraisals - too good to be true

What about those “instant” business appraisals for a few hundred dollars? Let the buyer beware: professional appraisal takes time. And time costs money. With a “minimum wage” business appraisal you quite literally get what you pay for.

So, can you get an accurate, defensible business appraisal and save?

Yes indeed! Given the right tools, you can do your business appraisal yourself - and save quite a bundle.

Most of the business appraisal cost is in the time the appraiser takes to do the work. And most of the time is spent understanding the business being valued.

Obviously, you can use your own knowledge of the business to cut down on time and costs. But what about the business valuation tools and knowledge?

A complete business valuation system

That’s where ValuAdder comes in. To make sure you can do your business appraisal yourself, ValuAdder gives you both the knowledge and tools to do it:

1. Complete business valuation software system. You can use the same valuation methods the professional appraisers use to calculate your business value.
2. A Learning and Information Center and 190-page Business Valuation Handbook. There is plenty of expert advice and guidance to get you through your business appraisal.

There is a Business Valuation Guide to introduce you to the fundamentals of business appraisal. Detailed Tutorials on valuation methods and helpful How-To Sections with examples. Every term is defined and explained in the Glossary.

To save you both time and money, ValuAdder is designed to simplify and speed up your business appraisal:

• Do split-second business market value comparisons in any of 400 industries.
• Determine business value based on its earnings and risk.
• Calculate business goodwill and total business value.
• Structure a successful business sale or purchase.
• Get tips on each input - right as you enter your numbers.
• Pick and choose the tools you want with a mouse click.
• Generate reports and share your business valuation results in the format you want: PDF, spreadsheet, Web page.

Latest word in valuation software reliability and accuracy

You may ask: how is all this possible? The short answer: state-of-the art technology and sound software engineering.

ValuAdder relies on the leading edge Java technology to give you a superior business valuation system - at a fraction of competitors’ costs:

Do your business valuation on any computer of your choice, in any currency

You can run ValuAdder on any Windows, Mac OS, Linux or Unix computer. ValuAdder naturally adapts to your computer preferences and settings - including multi-currency calculations.

Open Source technology saves you money

Java and Open Source lets us cut down dramatically on our development costs - and we pass the savings directly to you!

State of the art in security, reliability and accuracy

This technology also makes your ValuAdder an extremely stable, reliable and accurate business valuation software system. 

Less support costs for us, better price for you!

Valuing a Business based on Income, Assets, and Market Comps

One common reason business people get their businesses appraised is gift and estate taxes. Grants of business ownership interest by living owners to family members trigger gift tax liability. If the owners pass away, the business is inherited by the younger generation. One of the first tasks for the new owners is how to handle the very large estate taxes. With estate tax rates approaching 50%, the tax bite may be very painful.

Business valuation results: high or low?

Usually, business owners are interested in the highest business valuation possible. This is certainly the case if the business is to be sold to a third party. The same desire for high valuations applies if you consider partner buy-ins, and outside investment, whether venture capital or debt financing.

Gift and estate tax situations are very different. Since the tax is assessed on the current business enterprise value, business owners are interested in the lowest possible figure for their business value.

The tax authorities, for obvious reasons, are skeptical about low business valuations. Experienced tax agents expect that business people want to reduce their taxes - and often retain skilled tax lawyers and accountants to help them do so. Since gift and estate taxes are among the highest, it is natural that business owners would seek the most conservative estimate of their business value.

Tax authorities may develop their own business appraisal. Not surprisingly, the tax man’s business valuation may be quite a bit higher than the owners’ value estimate.

Business valuation: points of contention

Business owners and tax agents typically disagree on what a business is worth on the following points:

1. Total business value.
2. Discount for lack of control.
3. Lack of marketability discount.

Since any business valuation result depends upon the set of assumptions, tax authorities may challenge your business appraisal by questioning your financial forecasts, risk estimates, as well as definition and premise of business value.

Business valuation is always forward-looking. Will the business earnings continue growing at their historic pace of 10% per year? Or will the growth rate stay within 5%, as claimed by the businsess owners? Will the industry become more risky in the next 5 years? Will the business continue operating or have to exit certain markets and sell some of its assets? Depending on which position is taken, the business valuation results you get will differ considerably.

Whether the assumptions of business owners or tax agent are more accurate, only time will tell. The business valuation result needed today may become a matter of dispute between the owners and tax authorities. And if the two sides cannot develop a reasonable compromise, these situations often end up in court. To avoid the costs of litigation, it is best to work out a solution acceptable to both sides.

Marketability discount and private business sale comps

Tax authorities generally understand that private business ownership interest is less marketable than public company securities. The question often is the amount of marketability discount that applies. Again, the owners tend to argue for higher marketability discount percentages.

This is where private business sale comparable data comes in very handy -  if you can show the selling prices of similar closely held businesses, the fair market value of your business is much easier to defend.

Control premiums and minority discounts

If the value of partial business ownership interest is disputed, you can work up a reasonable minority discount by citing the control premiums paid for business acquisitions in your industry. Most sales of public company stock are minority ownership transactions. On occasion, a controlling ownership interest is acquired. The offer terms are publicly disclosed and typically state the price per share - which often includes a premium over the current share market price.

Alternatively, you can value the business ownership stake directly by using the Discounted Cash Flow method - and calculating the present value of the expected returns to the minority shareholder.