What is My Business Worth?

When it comes to selling your business, understanding its value is crucial. You want to make sure you get the right price for your business and that someone pays you what it is worth.

You’ll get the best advice and best guide working with a broker who has a wider understanding of what is happening in the marketplace, but we’ve also created this step-by-step guide so you can get some idea yourself.

 

Step 1: Gather Financial Information

The first thing you'll need to do is collate all your financial information. Get your last 3 years full trading year's profit and loss statement and other financial documents together. This will give you a sense of the net profit of your business. Keep in mind that this is just a guide, and the final value of your business will be determined by the buyer.

 

Step 2: Identify Add-Backs

 Add-backs are expenses you've paid that aren't normally required by a cash buyer and are usually discretionary spending some Add-Backs that you may want to include are things like donations, travel, and car expenses. Here’s what we mean: 

-   Donations: Any charitable donations made by your business can be added back as they aren't typically required by a cash buyer.

-   Travel: If you've incurred expenses for business-related travel, these can also be added back as they may not be necessary for a new owner.

-   Car expenses: If you're using your personal vehicle for business purposes, these expenses can be added back as well.

 

Step 3: Include Owner's Wages

If you've paid one owner a wage through payroll, 40 hours a week of this time can be included in the add-back amounts. 

 

Step 4: Calculate Adjusted Earnings 

Add the net profit with the add-backs to give you a total adjusted earnings figure. This number represents the amount of money a buyer can expect to earn over the course of a year. 

 

Step 5: Apply a Multiple

The price that a buyer will pay for your business depends on a variety of factors, such as the risk in the business, the style of the business, and the location. However, to get a rough estimate of your business's value, you can apply a multiple. A multiple is simply a way of calculating how many years a buyer will have to work for free before they get their money back. 

For owner-operated businesses, these multiples are typically between 1- and 1.5-times adjusted earnings. Sometimes this is also referred to as a "return on investment" and is displayed as a percentage.

Example:

Nett Profit: $100,000 per annum

Addbacks: $50,000

Total Adjusted Profit: $150,000

Multiple: 1 - 1.5

Estimated Sale Price: $150,000 - $225,000

It is important to note that this is just a rough estimate of your business's value, and the final price will be determined by the buyer. It is recommended to consult with an experienced business broker for a more accurate and detailed valuation of your business. If you would like help appraising your business, please don’t hesitate to get in touch today for a no-obligation chat.