Mar 2, 2020
Robert Hirsch from Freedom Factory, discusses the commonly asked question, "What is my Business Worth?", frequently asked by business owners, and people who want to start a business.
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What is My Business Worth?
Hi, Robert Hirsch from Freedom Factory here. One of the questions that we get most often is, what is my business worth? If you're like me, most entrepreneurs are so interested in growing their business that what it's worth doesn't really come up that often. I always focus on growing sales, and I figure if I grow sales, and I run it efficiently, the business is going to get better and it's going to be worth more. In general, that's right. But it doesn't answer the question of what it's worth. Most entrepreneurs say, okay, where do I begin? When I think of where do I begin, I always think of earnings.
A lot of people talk about EBITDA, which is for taxes, and that can be adjusted into the seller's discretionary cash flow. But you figure out how much your businesses is worth based upon how much it earns., and it depends. There's a lot of factors, what industry are you in, how long has it been around? Do you have a customer concentration issue? What that means is, do you get 80% of your sales from Walmart, or do you get no more than 20% from any one customer? There's a lot of intangibles that go into it. BUt if you have a smaller business, let's call it a million in earnings. In general, it's worth roughly three to five times earnings.
Now, that is super rough, and it gives you just kind of a thumbnail that you can use. And of course, we can answer it in more detail when we look at it, but what that means is, let's say you have a customer concentration issue, let's say you have, whatever it may be, you have some, you have some competitors that are taking business away from you aggressively, you're probably going to be on the bottom end of that. Now, if you have some intellectual property that's defensible, or if you’ve been around for an awful long time, or if you have some sustainable, competitive advantage, the way I like to think of it is how big is the moat around the business or how big is the moat protecting you? Then you're going to be on the upper side of that.
So there's always a range, and the intangibles really take you up and down that range. Now, a big fear that a lot of entrepreneurs have is, what if I undervalue my business when I go to sell it and this is my largest asset? For a lot of people, they say the home is the largest purchase you're going to make.
Now, if you're an entrepreneur like me. That's not exactly true. It's your business and buying your business and selling your business, and you're trying to think specifically, Hey, how do I not leave money on the table. And conversely, you don't want to overprice it and get people not interested.
Getting to a really good market value is very important. It's essentially, how do you put the right team together and make sure that you're pricing it according to market conditions. There's a lot of intangibles that happen. For example, let's say the tax environment's going to change. Maybe we're going to have a new president this year, or maybe we're going to have some tax reform going through that's going to affect long-term capital gains. Well, that might make you want to close before the end of the year. And so sometimes when we have those artificial, either floors or ceilings, they really affect our market timing.
So we want to stay pretty focused on that. But in general, to me, there's appraisers and appraisers are really good for estate sales, for things where nobody's running it, but the problem with appraisal value, especially in small business, is nobody's willing to write a check for that.
So if an appraiser says, your business that makes $1 million is
worth 5 million, and no one's willing to write a check for that, it
doesn't do you a lot of good. So, for me, I buy and sell businesses
full time. It's all I do. I would trust a full time business broker
that all they do is focus on comparable sales in the last six
months with businesses similar to yours.
And I would really focus on market data because almost nowhere else is market pricing more important than small business. The importance of a broker is pretty significant here because let's say you're selling your house and let's say you have the best broker in your area as opposed to an average broker.
Well, he might be able to get you five or 10% more. And the
reality is the appraiser's going to come in and they're going to
give you an appraisal value and you're not going to be able to sell
it for more. So in some ways, real estate is more of a commodity,
but businesses, for example, you can change for EBITDA to seller's
discretionary cash flow.
If you have a range like we used before from three to five times earnings. If you can get a broker that gets you away from three and gets you towards five and your business makes $1 million, you just made a million and a half more with effective 23% tax rate. That's awesome. That's $1 million more in your pocket.
Or for example, sometimes I've worked with businesses that were in the wrong industry classification and maybe they started off there, but maybe they've evolved as your business has grown over the last five or 10 years to a totally different industry classification. So it's taking it to market, putting a story together, maximizing the sale of your business.
Those are the things that are really important when you think about selling it. I hope this is helpful for getting what it's worth. If you want to call us over at Freedom Factory or if we can give you any help whatsoever, we'd love to do it. Please hit like and subscribe. Thanks for watching and we'll see you soon.
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