It’s the question every business owner wants to know before exploring a sale of the business with an M&A advisor/business broker. The answer is anything but simple.
Unlike residential real estate, where you can easily compare your three bedroom, two bath home to one that sold recently in your neighborhood for $375,000 with the same general characteristics, determining a realistic fair market value or trading range for the business prior to a sale is far more complex.
Unless you are a franchise, your business is likely very unique. In many cases, it is the creation of its founder, and occupies a niche in the market with its own set of characteristics. There are myriad of considerations that must be taken into account. Among them:
- Smaller businesses (annual revenues of $2 million or less) are typically valued using different cash flow metrics and multiples than larger businesses with revenues up to $50 million.
- The financial performance of the business over the past 3 years prior to sale is extremely relevant. Higher growth businesses will be valued a higher multiples of cash flow than slowing growing or declining businesses.
- A diverse customer base – as opposed to one with just a few large customers – impacts value. Businesses with a few, large customers are considered “riskier” by buyers because the loss of one customer can wreak havoc on profitability.
- The presence of a management team and motivated key employees is critical. A business that is “principal centric,” – meaning all or many aspects of the business operations revolve around the owner – can be a detriment to business value.
- The extent to which you have a dominant position in the market or serve a unique niche can greatly impact value. Product or service differentiation (or lack thereof) can have tremendous influence on what buyers will pay, particularly in the minds of strategic buyers looking to gain a competitive advantage through the acquisition.
- The future outlook of the business may be the most important business value driver of all. While buyers are paying some multiple of cash flow, what they are really buying is the opportunity of the business going forward and its prospects for growth and profitability.
These are just some of the many considerations business brokers must take into account when providing business owners with a preliminary valuation prior to a sale. The process is part art and part science. The extent to which the M&A advisor/business broker has experience in selling a broad range of businesses across many industries and over many years will go a long way toward nailing a realistic fair market value or trading range of the business prior to a sale.
Gold Country Advisors has nearly 20 years of experience in evaluating and selling privately held companies across many industries. For more information on a preliminary valuation of your business prior to considering a sale, contact us at 916.673.9778.