With the amount of privately held businesses, there should be an easy way to determine the worth of a privately held business. If you are looking for the “fair market value” of a public business, you would be able to find it’s valuation on the stock market. That is not the case for private businesses.
Financial statements and tax returns are not enough to base your businesses value on. Prices paid for similar businesses are often times hard to find as the sales agreements are usually kept private. And public company valuations may provide some context, but are hard to translate even when you take into account the difference in size, stability, liquidity, and a number of other factors.
There are two valuation methods you could look into. The Discounted Cash Flow (DCF) method tries to estimate the future cash flows and use that to determine the current value. The EBITDA valuation method takes into account the EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, multiple to come up with the current value. The issue with these methods is that they are both just estimates, and your estimates may differ from your buyers. They also do not take into account additional factors that could affect an offer, like cash versus earn-outs, working capital, or warranties, to name a few.
The most reliable indicator of the value of a business comes by finding out what people will pay for your business. This means taking into consideration multiple offers and juggling them until you can come to an agreement with a buyer. Buyers will decide what to pay based on what they believe your company will make them. That means you may have to prepare to represent your business in the best possible way with well-presented documentation, an investment thesis, and knowledge on how to counter price-chipping, a common strategy buyers use to reduce the price based on identifying possible issues with your business.
At the end of the day, evaluating a business is a complex process. Even if you follow all the guidelines and advice, there are probably assets or issues that you are going to miss. That is why the easiest course of action is to call in a professional, like Opportunities in Business. With our experience, specialized knowledge, and tools, we will give you the most accurate estimate of your business’s worth and help you find the buyers you need.