For business owners, an important question that often goes unanswered is what is my business worth? Outside of home ownership, business ownership is typically the single most valuable asset that a person will own. Although there are ways to estimate your home value (your friendly neighborhood real estate broker, online services such as Zillow!, local property appraiser), how do you track the value of your business?
Business brokerage is an overlooked field in relation to traditional real estate. There is plenty of education and information available on traditional real estate, investment properties, approaches to property valuation, and general real estate market guidance. On the other hand, many commercial real estate brokerages don't work in the field or publish information relative to business brokerage. At Swann Real Estate, we want to provide this information to you. Let's start with three major factors that influence what your business is worth...
Business brokerage is an overlooked field in relation to traditional real estate. There is plenty of education and information available on traditional real estate, investment properties, approaches to property valuation, and general real estate market guidance. On the other hand, many commercial real estate brokerages don't work in the field or publish information relative to business brokerage. At Swann Real Estate, we want to provide this information to you. Let's start with three major factors that influence what your business is worth...
1) Net Earnings
Net income (or more accurately, "seller discretionary earnings") is at the core of a business valuation. Annual net income is determined and certain expenses are "added-back" to calculate seller discretionary earnings (SDE). These add-backs could be auto expense, trip expense, interest expense, and other figures that could be rendered non-applicable and/or discretionary if a new owner was to purchase the business.
Starting with tax returns for the past three years is a good way to determine net income and what these add-backs may be for your business to accurately calculate seller discretionary earnings. As a result, business tax returns are the first things we look to analyze when determining market value of a business. Typically a business is worth a multiple of these seller discretionary earnings.
2) Business Type
When determining what multiplier should be applied to seller discretionary earnings, business type is a large component. What is the industry of the business? How is the income generated? Is it tied directly to the owner or are there systems in place to ensure cash flows if the business was to be sold?
3) Recent Business History & Growth Potential
Recent business history and growth potential also affects the multiplier. Are the tax returns showing a positive or negative trend? Are there additional revenue streams that could be generated in the business? Business history and growth potential impact the multiplier and as a result increase or decrease the value of a business.
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This is the starting point to determining market value for a business. There are many additional factors that play into the equation as well. At Swann Real Estate, we can help to identify the factors, whether you a preparing for a sale or simply looking to better monitor the health and value of this important asset. Visit our Business Brokerage page to reach out for more information.
-- Turner Swann, CCIM