How to establish what your business is worth.

There are many ways to get a gauge as to what your business is worth. It is normally best done with a business broker to understand what the market will pay for a business like yours, but we want to give you an idea using a basic example to establish an estimated range.

To do this you’ll need your last Full trading Year Profit & Loss Statement - remember this is just a guide.

Step 1 – Take the nett profit from the bottom of your tax return or management accounts.

 

Step 2 – Identify any Add-backs – Add backs are expenses you have paid that are not normally required by a cash buyer and are usually discretionary spending. These maybe donations, travel, car expenses... if you are unsure please contact one of our brokers.

Step 3 -  If you have paid one owner a wage through payroll - 40hrs a week of this time can be included in the add back amounts.

Step 4 – Add The nett profit with the add backs to give you a total Adjusted Earnings figure.

This number is the amount of $$ a buyer can expect to earn through the course of a year.

The price that they then pay for the business is then dependant on the risk in the business, the style of business, the location and many other factors but this will give you a range rather than a definitive price (only the buyer will determine that).

Step 5 – Apply an appropriate multiple – to explain a multiple – it is simply put as – how many years will I have to work for free before I get my money back?

The buyer will determine the multiple that is applicable to them but in owner operated businesses these multiples are normally between 1 and 1.5 times adjusted earnings.  Sometimes you might hear this as a 'return on investment' displayed as a %.

As an Example – Nett Profit is $100,000 per annum, Addbacks total $50,000, Total adjusted profit is $150,000. Multiple is 1 - 1.5  Estimated sale price is $150,000 to 225,000

This is a quick example of how to determine what your business could be worth to potential buyers. This exercise would be best completed with an experienced business broker to narrow the range of your estimated price.