What a business is worth.
WHAT DETERMINES VALUE ULTIMATELY
What a buyer will pay.
WHAT APPROACHES ARE COMMONLY USED
A multiple of earnings Asset value Discounted future cash flows Comparable transactions
WHAT AN EARNINGS MULTIPLE MEANS
A figure applied to sustainable annual profit.
WHAT SUSTAINABLE PROFIT MEANS
Profit adjusted to reflect what the business would earn under a new owner.
WHAT ADJUSTMENTS ARE TYPICALLY MADE
Adding back the owner's excess remuneration Adding back personal expenses run through the business Deducting a market salary for the owner's role Removing one-off items
WHY THE MARKET SALARY DEDUCTION
Someone must do the owner's work, and they must be paid.
WHAT DETERMINES THE MULTIPLE
Size of the business Predictability of earnings Dependence on the owner Customer concentration Growth Sector Quality of records
WHY SMALL BUSINESSES ATTRACT LOW MULTIPLES
They are risky, dependent and hard to verify.
WHAT ASSET VALUE MEANS
What the assets are worth, less liabilities.
WHEN IT APPLIES
Asset-heavy businesses, and businesses not earning.
WHAT TO BE REALISTIC ABOUT
That most small businesses sell for modest multiples of adjusted profit, if they sell at all.
WHAT DESTROYS VALUE
Unverifiable income Owner dependence Concentration Declining performance
WHAT TO OBTAIN
An independent valuation, before negotiating.
WHY
It anchors expectations, including your own.
