Filed under: Small business
Let’s state you want to sell or purchase a business. Or, suppose you want to gift a piece of your business to your family. Maybe you want to raise capital?
Well, you’ll need to determine the value of your business.
So, to get some perspective on the topic, I spoke to Scott Gabehart. He has valued over 700 businesses since 1991 and has written several books on the topic, such as The Business Valuation Book (with CD-ROM)
According to him, there are several approaches to getting a valuation:
Do-It-Yourself: Yes, the valuation process can be extremely complex. But Gabehart has an easy system that will provide a rough estimate.
First, you will need to calculate your company’s adjusted cash flow (ACF). This is:
Net income
+ Your salary
+ Your perks (personal travel, discretionary expenses)
+ Depreciation
+ Interest expense
After all, it’s common for owners to use their business to pay for personal expenses. Thus, it’s important to factor our certain items (for example, depreciation is a non-cash expense).
Now, once you have the ACF, you need to multiply it by a multiple. Generally, the higher the ACF, the higher the multiple.
Here are some guidelines from Gabehart:
- ACF up to $250K, multiples of 1 to 3
- ACF between $250K and $500K, multiples of 3 to 5
- ACF between $500K and $1m, multiples of 5 to 7
- ACF over $1m, multiples over 7
On the internet Services: There are some web sites that generate basic valuations, which are usually based on real transactions. Examples include: BizBuySell.com and BizComps.com.
However, you need to be wary. According to David C. Baker (who operates ReCourses), valuation web services might “essentially be billboards to get you to hire a consulting firm, with very tiny hard content from a thought leadership perspective.”
Hire a Valuation Firm: Like any consulting industry, there are varying degrees of quality (yes, some valuation firms are fairly mediocre).
So, when selecting a valuation expert, look for the following:
- Is the person certified? The main organizations include: Institute of Business Appraisers, National Association of Certified Valuation Analysts, American Institute of Certified Public Accountants and American Society of Appraisers.
- Does the firm have a web site? This shows that the firm is serious.
- References? Don’t be afraid to ask for them.
- Costs? These should range from $2,000 to $15,000, depending on the reason for the valuation and the scope. Also, don’t pay the fee up-front; instead, pay based on different stages (the first might be the initial meetings for data input and the second could be the actual report).
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