How do business brokers value a business?
In fact, the Broker's Opinion of Value takes a market approach, pragmatically determining the “Most Probable Sales Price” by approaching what the business would be worth to a future business owner, and then applying a multiple of earnings based in research of what similar businesses have sold for.
Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it's coming directly from your accounting/record keeping.
When Business Brokers speak about the value of your business, they are specifically referring to what is the likely selling price range of a business. While we are experts in determining the likely selling price range, we cannot use the term 'Valuation' but instead the term 'Broker Opinion of Value'.
Three of the most common and widely used techniques for business valuation are detailed here. They are the discounted cash flow method, comparable companies analysis and precedent transactions analysis. They use financial statements and documents to determine a company's value.
Earnings multiples (P/E) — In this method, investors estimate the company's earnings over several years, called the price-to-earnings (P/E) ratio. For example, if a typical P/E ratio is 15 and investors predict the company will earn 200K per year, the business is worth three million dollars.
There are five sources of added value for a small business: convenience, branding, quality, design and unique selling point.
The Revenue Multiple (times revenue) Method
A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000.
A business will likely sell for two to four times seller's discretionary earnings (SDE)range –the majority selling within the 2 to 3 range. In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000.
Discounted Cash Flow (DCF) or income-based valuations calculate a business's value based on its projected cash flow, which is then partially discounted to account for a buyer's risk.
A broker price opinion (BPO) is an unofficial assessment of a property's potential market value based on expert judgment. A BPO is often based off of qualitative and subjective factors such as neighborhood characteristics, curb appeal, and if the market is 'hot' or not.
How much does a brokers opinion of value cost?
Cost: Broker price opinions are also less expensive than the cost of an appraisal. An appraisal can run anywhere from $300 to 800 or more, and a BPO costs half that — and some times even less, roughly $50 or so, according to Andrews.
Additionally, a BOV is the broker's estimate or best guess at the value of a property, based on market data and industry knowledge. However, an appraiser requires much more research, analysis and data collection, so as to ensure more accuracy.
Most business owners use a number of different options to value their companies. One of the best options, though, is to use the standard valuation formula of three times your gross revenue. So, if you're making $1 million a year, your valuation then becomes $3 million. That can change based on your industry, though.
The most common are the three main methods of valuation: The asset based approach, earning approach, and market value approach.
Comparable transaction analysis – In general, comparable transactions > comparable companies. Comparable transactions include the premium paid in a competitive bidding process and should yield the highest valuation in theory.
There are, however, a number of words of wisdom to take on board and pitfalls for a business to avoid when taking their first big step. A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.
If a company is asking for $50,000 for 5% equity they are valuing themselves at $1,000,000. 5% x 20 = 100%. 20 x $50,000 = $1,000,000.
If you've decided you want to buy a percentage of the business, write up a basic offer and send it to the existing owners. Let them know that you're interested in buying a percentage of the business, and what kind of role you see for yourself. This is a basic, introductory letter.
This is why several other methods exist. Here's a look at six business valuation methods that provide insight into a company's financial standing, including book value, discounted cash flow analysis, market capitalization, enterprise value, earnings, and the present value of a growing perpetuity formula.
A business broker can provide valuable advice and guidance throughout the process of selling a business. A business broker can provide valuable advice and guidance throughout the process of selling a business. This is especially true for those who are not familiar with the process of selling a business.
How do private equity firms value businesses?
Discounted cash flow (DCF) analysis is a common valuation method used in private equity funds to estimate the present value of a company's expected future cash flows. The DCF analysis takes into account the time value of money and the risks associated with the company's future cash flows.
- Price-To-Earnings Ratio (P/E) Valuation specialists commonly assess a small business based on their price-to-earnings ratio (P/E), or multiples of profit. ...
- Entry Cost Valuation. ...
- Asset Valuation. ...
- Market Comparison.
