What's My Business Worth?
The old cliché, "It's worth what a buyer will pay you for it," is true. Any valuation study for business owners looking to exit the business should look at the business through the eyes of the buyer.
And even though there are twenty-odd approaches to value in appraising businesses, the buyer is primarily interested in only one: return on investment, ROI.
ROI equals the annual cash flow of the business divided by the cash invested.
The buyer has three questions to contemplate in deciding the cash to invest in purchasing a business:
| 1) | What is the Risk of the investment? |
| 2) | What is the future Cash Flow of the business likely to be? |
| 3) | What is the Leverage? (Purchase price includes cash from the buyer and monies borrowed) |
So What's My Business Worth?
It's worth the perceived future cash flow divided by the ROI target of your buyer and adjusted for the risks you are willing to share in financing (supplying leverage) the transaction.
Some typical ROI targets are:
 | Distribution businesses |
30-40% |
| Manufacturing with proprietary products |
15-25% |
| Contractors |
35-45% |
| Service |
30-40% |
In general, the larger the revenues, the lower the perceived risk; the larger the gross margins, the lower the perceived risk. An exit plan that addresses and reduces the buyers perceived risks enhances value and a well-executed marketing campaign enhances value.
In the final analysis, the buyer's analysis of the perceived risk, cash flow and leverage determines the offer you will get for your business.
|
