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.

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.

If you are like most business people, CPAs, brokers or investors, you probably take the actual business selling prices as a strong indication of what a similar business is worth.

In fact, the market approach to business valuation relies on such selling prices comparisons for a good reason:

Business selling prices offer an objective evidence of how other business people determine the value of businesses.

A large enough number of arms-length business sales is also a good way to establish the fair market value of your business. This is useful even if you do not plan to buy or sell the company.

Here are some key situations where the fair market value is the de-facto standard for business appraisal:

• Gift and estate taxes
• Divorce and other legal disputes
• Buy-sell agreements
• Employee stock ownership plans (ESOPs)

That said, the question is this: just how well do the recent selling prices of similar firms represent the value of your business?

Business selling price: key elements

First, some points about the elements that can make up the business sale price:

1. Buyer down payment
2. Seller financing
3. Lender financing
4. Earnout
5. Key employment agreements
6. Non-compete agreements with outgoing management or owners

Whether all these elements exist in a given business sale deal can make a material difference to the contract business selling price.

Business market value is affected by deal financing

In just about any industry, seller-financed deals tend to result in higher selling prices. If the deal can be financed through a commercial bank loan on attractive terms, the business selling price is likely to reflect it as well.

Typically, the business selling price includes the seller and lender financing at face value, i.e. not discounted over the time it is paid off. Arguably, the cash value of a financed deal is lower than an all-cash business sale.

Earnouts are usually excluded from the business selling price

By convention, the earnouts are excluded from the broker-reported business sale price. That’s because the earnout is contingent upon some future events and may not be paid in full measure or not at all - if the business fails to achieve the objectives agreed upon between the seller and buyer.

Other valuable parts of the business selling price

On the other hand, the employment and non-compete agreements with management and key staff are usually included in the selling price.

Private business value is determined based on total invested capital

Another important rule in valuing small businesses is that the value is established on the total invested capital basis. This includes both the owners’ equity and long-term debt.

That is very different from the public company valuation multiples that are typically computed on the owners’ equity basis only. If the company being valued uses debt financing, the resulting valuation results can be very different!

Get a defensible business value number by following established conventions

Since these conventions are followed by most professional business appraisers, it is wise to stick with them - if you want to avoid the challenge by other business people, tax authorities or courts.

Check your valuation multiples

Valuation multiples derived from market comps are the tools you can use to estimate your company’s fair market value. You can calculate it in relation to your firm’s financial performance such as revenues, gross and net profits, EBIT, EBITDA, business assets or owners equity.

When you use such valuation multiples, you need to be aware how they are calculated. Otherwise, your business value estimate may be way off.

If you want to get a top quality business appraisal, consider using several well-known business valuation methods.

Such a multi-method business valuation is standard in professionally prepared appraisals. Since each method represents a different view of how business value is measured, reviewing the results from several different methods gives you a comprehensive picture of what the business is worth.

In practice, you can choose some valuation methods over others because they are more suitable for your specific situation. Here are the typical method choices used for valuing established service firms:

• Valuation multiples based on comparable business sales
• Multiple of Discretionary Earnings valuation method
• Discounted Cash Flow method
• Capitalized Excess Earnings method

Using market comps to value a service business

Successful companies in the services industry sell often. Hence you can do valid market comparisons to recent business sales to see what your business is worth.

The valuation multiples are ratios that help you estimate the market value of a business based on the actual selling prices of similar firms and your company’s financial performance measures. Business value is usually measured against the firm’s revenue, profits, cash flow, EBIT, EBITDA, business assets or owners equity.

Valuing a company by direct capitalization of earnings

Smaller service businesses, especially those with mostly recurring revenues, can be valued using the Multiple of Discretionary Earnings method.

Discounting cash flows to determine business value

For larger firms or those experiencing significant earnings fluctuations over time, the Discounted Cash Flow method may be more appropriate.

Valuation of business assets: tangibles and goodwill

Business goodwill can be a big part of the total asset base for service companies. To determine the value of goodwill, consider using the Capitalized Excess Earnings method, also called the Treasury Method.

Establishing business value

The results you get by using the various business valuation methods may differ. This is quite normal since each method uses a different set of rules to determine business value.

You can use your results to establish a range of business values, from low to high. On the other hand, you can average your business value results and come up with a single number. Both techniques are very common in professional business appraisals.

One of the most difficult situations that often call for a business appraisal is divorce. Just about any jurisdiction considers business ownership interest a property that is part of the marital estate. As such, it must be distributed among the spouses.

In the US, the family courts follow two standards on how the property in the marital estate is to be divided:

1. Community property
2. Equitable distribution

Under the community property standard, all assets acquired during a marriage are treated as jointly owned by the married couple. They are thus divided into equal parts upon divorce.

Those jurisdictions that adopt the equitable distribution standard may or may not treat the business ownership interests as equally divisible. The courts have considerable discretion when deciding which party gets what share of the property.

Business valuations at different dates may be needed

In some cases the courts may treat business ownership acquired separately as part of the marital estate. To determine if the business value has appreciated during the marriage, the court may require that two business appraisals be performed:

• Initial valuation of the business at the beginning of the marriage.
• Re-valuation of the business at the time of divorce.

If the business value has increased over time, as demonstrated by the two business appraisals, a spouse may be able to claim part of that value, especially if that spouse was actively contributing to the business.

Needless to say, business value changes over time. In a lengthy proceeding, the valuation date can make a big difference to the amount of the final property distribution. Ask your lawyer if the court is likely to accept the business value:

• As of the marriage date
• On separation
• When the divorce is filed
• At the time of the court proceedings.

How business value is measured in a divorce

To make matters more interesting, courts do not have one standard of value. In reality, the following main standards of business value have been used in divorce cases:

Investment value

Under this standard of business value, the argument holds that the divisible property should be valued at what it is worth to its present ownership, i.e. the married couple.

Fair market value

The proponents of this well-known standard maintain that one spouse should not be compelled to pay more or less than what the business can fetch if put on the market.

Intrinsic value

Used less often, this standard of business value requires an in-depth analysis of the business fundamentals to determine what the company is worth.

Fair value

Defined by the legal system, this standard tends to be subject to the court’s interpretation. In fact, the fair value of a business may be equivalent to any of the above standards of value, depending on the jurisdiction.

Business valuation methods for divorce

As in most situations that call for a business to be appraised, you have a number of choices among the three valuation approaches:

1. Asset - based on the values of business assets and liabilities.
2. Income - based on the company’s earnings outlook and risk.
3. Market - where the firm’s value is established in comparison to the sales of similar businesses or professional practices.

Business goodwill valuation in divorce

In many cases involving ownership of established businesses and, especially, professional practices, the question of business goodwill is of major concern.

A common business valuation technique used in marital dissolution situations is the Capitalized Excess Earnings method. Known as the Treasury Method, this technique offers a consistent way to determine the value of business goodwill and total business value.

This is important because of the way a particular court may handle business goodwill. Here are some common possibilities:

• Treat business goodwill as part of the marital estate and, therefore, distributable among the parties.
• Split the goodwill into the personal and institutional parts and handle only the institutional portion as distributable.
• Exclude business goodwill from the marital estate altogether.

Since business goodwill is often a large part of the total business value for many professional service firms, the amount and handling of goodwill can make a major difference to the final settlement!

Use of multiple business valuation methods is typical in divorce cases

It goes without saying that a comprehensive, defensible business appraisal is critical in divorce situations. Using a number of established business valuation methods, you can ensure the value of a business is accurately determined and can be defended in court.

Under the income approach, the courts consider both the capitalization and discounting valuation methods. Generally, direct capitalization valuation, such as the Multiple of Discretionary Earnings method, is best suited for companies with a track record of stable earnings. The Discounted Cash Flow method is the preferred choice for valuing young businesses or firms whose earnings vary considerably over time.

Market comparisons to recent sales of similar businesses offer an excellent and highly defensible basis to value your business. In cases of privately owned businesses, comparison to similar private firms is the preferred technique, known as the Comparative Transaction Method.

Defensible business appraisal is a must in divorce

More business appraisals are thrown out of court due to insufficient evidence or supporting information than any other reason. It behooves you to get all the facts together and review any business valuation critically if it is destined for a family court.

Discounts to business value

Depending on the jurisdiction, your business valuation may need to be adjusted for these factors:

• Discount for lack of marketability of a privately owned business.
• Discount for lack of control, if a spouse owns less than a controlling interest in the business.

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 are considering an outside investment for your business or looking to put money into a promising company, business valuation is surely to be one of the key data points in your decision making.

Significant investments are usually made in order to achieve some strategic goals such as increasing the business revenues, entering a new market or developing the next generation products.

Business valuation - a forward-looking exercise

The value of the business is thus driven by its future earnings. It also depends on the level of risk the company is likely to face as it pursues its plans.

Perhaps the most widely used business valuation methods for investment purposes are the income-based discounting techniques. The best known of these is the Discounted Cash Flow method. It enables you to determine the business value today, known as the present value, based on three fundamental inputs:

1. Future earnings forecast over some period of time, e.g. 5 years.
2. Discount rate which captures the business risk.
3. Long-term or terminal business value - or what the business will be worth at the end of the forecast period.

Savvy investors usually are very good at assessing the company’s prospects and risk. Since they consider a number of investment projects, they have an idea about the kind of return on investment they expect.

Put another way, they see the discount rate as the rate of return they require to become interested in a business investment.

Comparison of business value and investment - Net Present Value

One common technique these investors use is the Net Present Value calculation. It combines the Discounted Cash Flow business valuation with a direct comparison to the value of the proposed investment.

If the difference between the business value and the amount of investment is positive, the investment makes financial sense.

A special case is when the business value is equal to the investment value. The discount rate that makes this happen is known as the internal rate of return, or IRR for short. At this rate of return the business creates precisely the amount of value that justifies the investment.

Internal rate of return as a decision making tool

You can use the internal rate of return as a screening tool for a proposed investment.

If you are a business owner considering an outside investment, you should know both the amount of investment and the rate of return the investor expects. You can use the Net Present Value calculation to see if your business can grow in value to make the cut.

If you are thinking of investing in a company and have the size of investment in mind, then you can use the Net Present Value calculation to see if the business can create enough value to meet your required rate of return on investment. 

Using Net Present Value in a number of what-if valuation scenarios

Time value of money can make a major difference here. You can run a number of scenarios with different cash-out assumptions. Is an early exit a better strategy than waiting longer as the business value grows? The Net Present Value calculation helps you make such important decisions in a precise, fact-based manner.

ValuAdder gives you a set of standard tools to determine the value of a business, structure an acquisition deal, and make sound investment decisions.

Business Valuation System

One of the most challenging tasks you are likely to face when considering an outside investment is how to determine the value of your company.

Referred to by venture capitalists as the post-money valuation, this key step gives you a number of strategic decision data points:

• What the entire company is worth, known as the enterprise value.
• How the business ownership interests are split between the founding team and external investors.
• Whether the founders retain the controlling ownership of the company after the investment has been made.
• Is the investment worth taking given its effect on business value?

Business valuation of a high growth firm - First Chicago Method

Since the infusion of outside capital is likely to change the business earnings prospects going forward, the Discounted Cash Flow method is the standard choice for investment-driven business valuation.

This income-based valuation method lets you focus on the company’s earnings prospects and risk directly. The result is the “present value” of the firm - what it is worth today.

The additional capital can make a major difference to the business’s earnings prospects. Since the future is uncertain, it is best to create a number of forecasts and run your Discounted Cash Flow valuation for each:

1. Best case - under the most favorable assumptions of business performance.
2. Base or most likely case.
3. Worst case - if the business encounters unexpected “head winds” in the near term.

You can view the results as a range of possible business values or average them to come up with a single valuation number.

Business Valuation based on Cash Flow and Risk

Note that this valuation analysis is inherently forward looking and involves a number of subjective assumptions on your part. It is a very good idea to check the market in order to confirm your valuation results. Recent sales of comparable businesses give you an objective evidence of selling prices.

If you relate the business selling prices to the the firms’ financial performance, you can see how the market values these companies. More importantly, using the valuation multiples derived from the market comps you can estimate the market value of your own business.

Valuing a Business based on Market Comps

This combination of the comparative market value analysis and Discounted Cash Flow valuation is known as the First Chicago Method.

The method’s power is in combining the theoretically precise yet subjective business valuation based on its income prospects with a highly objective “reality check” of business market value based on the actual business sales.

You can easily implement the First Chicago method using the ValuAdder business valuation software:

• Select the Market Comps tool for your market-based valuation.
• Create a number of Discounted Cash Flow valuation tools, one for each valuation scenario.
• Calculate your business valuation results.

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. See an example of how valuation multiples can be used to value your practice.

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 talk to a professional business appraiser, it won’t be long before you hear about the business valuation approaches and methods. These are the tools of the trade - and it is important to understand their relationship.

Business appraisers enjoy having an arsenal of tools at their disposal. This gives them the flexibility to appraise just about any type of business or professional practice. Much of the appraiser’s expertise is in the proper selection of the right tools for each assignment.

Being highly organized people, the business appraisers like ordering things. So here is the basic taxonomy of the business valuation tools.

Business valuation approaches

At the top of the pile are the three ways to measure the value of a business:

• Asset Approach
• Income Approach
• Market Approach

Each approach lets you adopt a different view of what a business is worth. As the name implies, the Asset Approach looks at the values of business assets in order to determine the value of the entire company.

The Income Approach lets you measure the value of a business based on its ability to generate earnings at an acceptable level of risk.

Finally, the Market Approach offers you the way to estimate the market value of your business - by comparison to similar businesses that have recently sold.

Business valuation methods

When it comes to the actual calculation of business value, the business appraiser reaches to an array of techniques known as methods. Each major approach has a number of methods under it. The methods are the actual computational procedures you can use to calculate the monetary value of your business.

Here are the major business valuation methods grouped around their approach:

Asset-based business valuation methods

• Asset accumulation method
• Capitalized excess earnings or the Treasury Method

Income-based business valuation methods

• Discounted cash flow method
• Capitalization of earnings method
• Multiple of discretionary earnings method

Market-based business valuation method

• Comparative transactions method
• Guideline publicly traded company method

Best practice: multi-method business valuation

The methods differ in the fundamental approach and the details of the calculations. Since no method is better than the others, well-prepared business appraisals use a number of methods to round out their conclusion. Using a set of methods under each Approach is the best way to “cover all bases” - and get a highly accurate, defensible business apppraisal.

Multi-Method Business Valuation

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