How Much Is My Business Worth? Understanding Business Valuation Methods
The value of a privately held business is generally based on its financial performance, assets, future earning potential, market conditions, and what comparable businesses are actually selling for. But if you’re considering a sale, knowing what your business is worth is only part of the answer. The next question is: ‘Is it sellable at that value?’
Maybe you’ve had a number in your head for years. Maybe your CPA has given you an estimate. Or maybe another owner in your industry sold for a certain multiple and you’ve been doing some quick math ever since.
The problem? Those numbers don’t always agree.
That’s because the market doesn’t value a business based on one formula. Buyers consider profitability, risk, customer concentration, management, owner dependence, growth potential, financing availability, and other factors when determining what they are willing to pay.
“Everything is worth something, but is it sellable? Is it marketable?” - Jeremy Furtick of NorthStar Mergers & Acquisitions
That is exactly why NorthStar’s valuation process goes beyond producing a number. Through its Valuation & Sellability Assessment (VSA™), NorthStar establishes a realistic view of market value with the goal of understanding how sellable the business may be at that value.
What Is a Business Valuation?
A business valuation provides an estimate of a company’s value based on its financial performance, characteristics, and the purpose of the valuation. It’s a simple definition, but it isn’t always a simple calculation.
Two companies with the same revenue can have very different values. One may have recurring customers, clean financials, a capable management team, and little dependence on its owner. Another may rely heavily on one customer or require the owner to be involved in nearly every important decision.
Buyers see those businesses differently.
That’s why business valuation professionals may consider several different approaches instead of relying on a single multiple.
What are Common Business Valuation Methods?
Three of the most common approaches are asset-based, income-based, and market-based valuation.
Asset-Based Business Valuation
The asset-based approach considers what the company owns and what it owes.
An adjusted net asset method may modify book values to better reflect current market values, while a liquidation value estimates what might remain if the company’s assets were sold and its liabilities paid. This approach can be particularly relevant for businesses whose value is tied closely to substantial tangible assets.
Income-Based Business Valuation
An income-based approach focuses on the company’s ability to generate earnings or cash flow in the future:
A discounted cash flow analysis projects future cash flows and discounts them to present value.
A capitalization of earnings approach uses a normalized earnings figure and capitalization rate to estimate value.
The important point is that buyers aren’t purchasing yesterday’s profit. They’re buying the expectation that the business can continue producing income after the current owner leaves.
Market-Based Business Valuation
The market approach asks: What are buyers actually paying for businesses like yours?
This may involve reviewing comparable transactions, industry multiples, company size, earnings, growth, risk, and other characteristics.
NorthStar’s VSA™ specifically provides a market-based opinion of value, while also evaluating marketability, financing availability, likely buyer types, intangible strengths and weaknesses, and estimated timing.
Business Value and Sellability Are Different
A valuation may tell you what the business appears to be worth in today’s market. Sellability tells you how the market is likely to respond to it. (if you decide to sell your business)
That difference becomes particularly important when an owner is preparing for an exit. A business may produce impressive earnings while still having characteristics that concern buyers or lenders. NorthStar built the sellability component into its VSA™ for exactly that reason.
“We’re not in the business of convincing owners to sell now. We give them the information to make an educated decision and make the right choice for the long-term.”
Jeremy Furtick, NorthStar Mergers & Acquisitions
Sometimes that information supports going to market now. Sometimes it shows that the owner’s goals and expectations do not yet align with market reality, and waiting to sell may be the better decision. NorthStar’s role is to give owners the information they need to make an informed decision about whether going to market now makes sense.
That is where valuation becomes more than a number. Understanding both value and sellability gives an owner a clearer picture of market reality and better information for deciding whether to move forward with a sale.
What Can Influence the Value of a Business?
Financial results matter, but buyers are evaluating the entire business. That may include:
Consistency and quality of earnings
Customer concentration
Owner dependence
Management depth
Growth opportunities
Recurring or predictable revenue
Market conditions
Availability of acquisition financing
The overall attractiveness of the opportunity to potential buyers
Find Out More About the Value and Market for Your Business
NorthStar’s own transaction history reinforces the importance of getting the valuation and market strategy right. The firm reports 353 successful closings, more than $750 million in total transaction value, an average of 223 buyers per listing, and sale prices averaging 98% of asking price.
But every successful exit starts much earlier. NorthStar Mergers & Acquisitions offers business owners a no-cost, no-obligation Valuation & Sellability Assessment (VSA™) designed to help answer two questions: what is your business likely worth in today’s market, and how sellable is it at that value?
You may discover that going to market makes sense. You may discover that waiting is the better decision. Either way, you’ll have the information you need to make an informed decision about what comes next. Reach out today to get started.
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