Sooner or later, if you own a business, you must calculate what it is worth. This usually happens if you wish to sell the business and need a good solid sales price. Before you just guess at a good business price, you have to head straight on into a quagmire called EBITDA. This stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This is a metric that allows you to value your business based on your cash flow and on a recognized standard that all understand.
Instructions
1. Calculate your EBITDA. Add back into your net profits things like interest expenses and taxes. Then you can find out what other companies like yours were sold for and get a good feel for your competition. These figures are only benchmarks. The real value is in the talent of the staff and the loyalty of your customers.
2. Multiply these numbers times your EBITDA or cash flow to get a starting estimate of your company's worth. If you are a manufacturing company, multiply times 5.5-8.5; a tech company, multiply times 6-12; health care services times 5-9; retail times 4.5-7.5; public relations, advertising or media times 3-6.5 and restaurants from 4-8.
3. Placing a value on your business is not simple because there are so many outside factors. Decide on your market. Who will buy your business? What is the economy like? Is yours a business that can survive bad times and prosper in good ones?
4. Decide what your goodwill is worth. If you have contract customers or loyal returning customers, factor that in. There is no real dollar figure you can estimate for a good customer base, but it may well be the most valuable asset your business has, especially if you are in a service business.
5. Use an asset based approach for valuation. Total up all investments made in the business to-date. Once the assets have been added up, subtract any liabilities; these include all oustanding company debts and any lawsuits. Know how the depreciation in the value of old machinery or other assets that have declined in value and factor that into the worth of the business.
6. Compare your business with others in the field and learn comparable selling prices. Just as a residential Realtor does when she finds comparable prices of house sales in your neighborhood, you can find comparable prices for business sales like yours.
7. Use the company's past earnings to calculate a price. Those earnings are not a guarantee of future growth. In a failing or stagnant economy, you many have lower the price to sell the company.
8. Always consider getting professional help. Coming up with a fair selling price is not easy and often professionals can do it better and more quickly than you can.
