First in a Series about Business Valuation, Sale and Liquidity
So, you’ve been working for 30 years to build your business. Now, it is time to liquidate those assets in the business (inventory, equipment, and goodwill amongst others) and convert them to cash. And get on that next flight to Naples.
What’s next? To sell the business, you need to know what it is worth, of course.
You can estimate value yourself and then pay for a professional valuation to confirm it. Buyers of businesses often use a rule of thumb called EBITDA (earnings before interest, taxes, depreciation and amortization) for the cash flow that the target (your business) produces. Buyers will adjust EBITDA for both the effects of unusual events (i.e. the result of a lawsuit settlement) and for revenues and expenses that are not relevant to the ordinary operation of the business. That cash flow (similar to the payment coupon for a bond) can be used to service debt payments for the loans used to buy your business.
So, calculate that EBITDA amount for the past 12 months of your business and, use the following multiples to give yourself a rough sense of value:
- If your business is a distributor, has EBITDA of less than 10% of revenues, then the multiplier is 3 to 3.5 for a business greater than $10M in revenues. So, if revenues are $10M, EBITDA is $750,000 then the value of the business may be approximately $2.6M.
- For a manufacturing business with the same revenues and EBITDA, the multiple may be 4.5 resulting in a value of approximately $3.4M.
Of course, the above valuations are for the entire business (known as the enterprise value). The value of the equity of the business, the part that you and your shareholders own, is the enterprise value less the interest bearing debt (bank debt, for instance). Is that value enough for you? By the way, a valuation professional (look for the credentials of ABV (Accredited in Business Valuation)) can give you a detailed analysis of your valuation based on your companies performance, the reliability of its cash flow and, if possible, a comparison to similar businesses.
So, what’s next now? See the next edition of this series.