Business Worth

The Multiple of Gross Revenue Myth

Many believe that businesses are priced simply as a multiple of their gross annual revenue. While revenue is a factor, the number that is analyzed is much lower in the financial statement. It will be either the adjusted EBITDA (for mid-sized companies) or SDE (A recast number not found on the financial statement that is used when the owner actively works in a Main Street business) And while a profitable company is important in valuation, it is not the sole determinant. Profitability, growth potential, assets, and market trends all play significant roles. Higher interest rates, remote and hybrid work, labor shortages, supply chain issues, technology, and regulatory issues are just a few trends buyers are watching.

The "Industry Standard" Myth

There’s no one-size-fits-all industry standard for valuing Main Street businesses. Each business is unique, with different strengths, weaknesses, and market dynamics. Relying solely on industry averages can lead to overvaluation or undervaluation.

The "My Business Worth is What I Want" Myth

Emotional attachment and memories of long hours put in, and cash infusions to keep the business afloat can cloud judgment. While a business holds personal value for the owner, its market value is determined by objective factors like financials, market demand, and competitive landscape. A company may have made its owner a great deal of money, but if a buyer cannot replicate that history or if the source of income is concentrated with a few customers, the actual valuation will disappoint the owner. Value is determined from a buyer’s perspective.
At a minimum, a buyer must be convinced that the business income can cover the debt service. It must provide a reasonable income (lifestyle) for the buyer and family. It must provide a competitive financial return on the cash investment. The future potential must allow for reasonable growth without added debt. Finally, the perceived risk of buying the business must be reasonable.

The "Bigger is Always Better" Myth

Higher revenue doesn’t always equate to a higher value. A smaller, more profitable business with a managed growth plan in a niche market can be more valuable than a larger one with lower profit margins and cash flow difficulties.

Business Worth is a "Set it and Forget it" Myth

Business valuation is not a one-time event. Market conditions, industry trends, and the business’s performance can change over time, affecting its value. Regular revaluation is essential to ensure accurate pricing. In general, the number one way to improve business worth is to run the business every year as though the owner is preparing to sell it.

Business For Sale Ads Predict Worth

Pricing a business based on what other owners have listed their company for can be disappointing. About 50-80 percent of those businesses will not sell. If their list price was an unrealistic representation of business worth and it did not sell for that reason and you price yours the same way, you risk suffering the same fate.
By dispelling these myths and following a sound valuation process, sellers can ensure their business worth is fairly represented by the list price for their business, and buyers can make informed investment decisions.

Data Driven Approach

The better approach to pricing a business involves a realistic, data-driven approach. This involves: Thorough Financial Analysis: Analyzing the business’s financial statements, including revenue, expenses, profits, and cash flow, over several years. A pricing conversation can begin with a look at industry multiples, but a deeper dive is usually necessary to narrow the range of possible value to a good sale price. Market Research: Understanding the local market, competition, and industry trends to gauge the business’s position and potential. Professional Valuation: Engaging a qualified business appraiser or broker to conduct a comprehensive valuation based on multiple methods and factors.

Evaluating Owner's Financials

The first step in determining business worth for an Idaho or Texas Main Street business is to recast an income statement for a business sale. This adjustment will provide a clearer and more accurate picture of the company’s true earning potential. This is done by beginning with the reported income or loss and adjusting for owner salary, perks, and discretionary expense, plus non-recurring income and expenses, non-cash expenses such depreciation and amortization, interest expense, and rent normalization if building is owned. We will ask for your financial documents to perform this recasting.

Secure Data Vault

We will give you a link to a data room known as a vault. The vault is a much safer way to transmit your data than by email or Google drive. Our vault room has virus and intrusion protection, data encryption, and network firewalls. These features ensure the safety and confidentiality of your documents.