If you are preparing for a business sale or considering investing in an existing business the central question is: how much is the business worth?
One of the most useful approaches to answer this question is to look at the current selling prices of similar businesses. Once you gather enough information on what these businesses sell for, you can come up with a good idea of what your company selling price is likely to be.
To calculate the actual business market value figure, you would need to relate the selling prices you get from the market to the companies’ financial performance metrics. This gives you a set of business sale multiples such as
- Business sale price to net income
- Business sale price to EBITDA or EBIT
- Business sale price to gross revenues or net sales
- Business sale price to its cash flow, e.g. net cash flow or discretionary cash flow
- Business sale price to total assets
With these valuation multiples ready, you can calculate what your company is worth. For example, take your company’s most recent annual revenue and multiply it by the business sale price to gross revenue multiple. The result is the estimate of what your company’s market value is currently.
As the market conditions change, you will notice that the multiples you get change as well. That is why it is important to gather the recent business sales data. These transactions capture the current sentiment in the market place about how valuable the businesses offered for sale are.
No two businesses are the same, so your estimate of business value is an educated guess. It provides you with a number or a range of values where your company’s worth is likely to fall. Unique attributes that set a particular business apart from its peers in the industry may make the business more or less valuable in the eyes of investors. Hence, you can argue for a higher or lower valuation based on your knowledge of the business itself.
Alternatively, you can use other valuation methods that let you determine the value of a business based its income or asset base. These types of methods do not require a comparison to other companies. Instead, you calculate business value by directly analyzing your business.
Doing such calculations alongside your market comparisons is a good way to justify your results based on the business sale multiples.