Small Business Valuation Made Easy!

Business valuation can seem complicated. A couple of relatively simple methods will get you on the right track for what you need.

Are you considering selling your small business? Are you looking for financing for your small business? Are you creating a will or your succession plan? If you answered yes to any of those questions then you need to know the value of your business first.

There are many ways to create a valuation and each method may give you a different answer. This is actually a good thing because you may end up with a range of values. Depending on your purpose, this can provide you with a lot of guidance. For example, if you are planning on selling, then having a range might give you your starting asking price but also guide you to the lowest amount you would be willing to accept to complete the deal. There isn’t going to be a 100% accurate answer; at the end of the process, your business is only worth what someone else will pay for it. Here are two common ways to objectively value a small- or medium-sized business.

The first method is calculating a multiple of earnings. Essentially this method requires you to take the normalized net income of your business and apply a multiple to get to the value. First, to normalize your net income you have to add back all of the deductions you have made to lower your taxable income that were not part of the operation of the business, or are expenses that a new owner would reasonably not expect to incur. Some examples may be your personal salary, or expenses for a vehicle, your cell phone or extra meetings held at nice restaurants. Look closely at the potential list of items you want to remove. The more you can legitimately add back, the greater the increase will be to the value of your business.  Don’t forget though, what you add back must be reasonable because you will be expected to defend the adjustments to a potential buyer. Once you have normalized your net income, try to determine what multiple of that number would be typical in your industry.  There will be a range here as well with no definitive answer. Try checking with a business broker, looking online or at others within your industry. Many industries, especially those that are service related, may fall in the 2.5 to 3.5 times net earnings range. For example, if your normalized net income comes out to $80,000, these multiples would show a valuation range of $200,000 to $280,000. A flaw in this method is that an underperforming business may be significantly undervalued by a net income that doesn’t truly reflect the opportunity of the business. That is the potential gap.

The second method is calculating a multiple of sales. This method is quite simple: determine the sales multiple that would be typical within your industry and apply that to your gross sales. Use the same suggestions above to try to determine the multiple. Let’s assume the typical range for your industry is 0.75x to 1.25x sales. To continue the example, if your sales are $300,000, then you would get an expected valuation of between $225,000 and $375,000.

You can now see that the two different methods give two very different answers. It is noteworthy that if there is no overlap between the values you get using these two different methods, and in fact there is a significant gap between the two ranges, it could indicate an issue with the overall health and performance of the business. For example, it could reveal that your net income is relatively low compared to what the valuation would expect. This gap could influence the buyer’s decision. A flaw in the multiple-of-sales valuation method is that ultimately a buyer wants to know what his or her return on investment will be – what can they expect to make with this business relative to what they have to spend to get it. That’s why the income-multiple method is more valuable on its own, but the two methods together are even more useful.

When you combine the two ranges together, you arrive at an estimated range of between $225,000 and $280,000. After you’ve establish an estimated range, your next steps will be determined by the purpose of your valuation. If your intent is to sell the business, you will need to justify the gap between what you think the business is worth (top of the range) and what you might expect someone else to value it at if they were to offer to buy it (bottom of the range). Consider some of the following aspects that will improve your multiple:

  • Growing market share
  • Sales increasing over time
  • In a growth industry
  • Ease of entry
  • Availability of opportunity
  • Tenure of staff
  • Training and support for new ownership

Any of these factors will improve the valuation. You can use these points as leverage to help justify a higher selling price.

Valuing a business can be a very subjective process.  I have only outlined a couple of methods and ideas to give you a framework. If you are thinking of buying or selling, it’s important to look at the business as an investment – what will be the return on the investment? What is the opportunity cost compared to another investment? From there you can add or subtract any other emotional or qualitative judgement.  Always be prepared to negotiate and defend your principles.

Please feel free to leave any comments or questions below.

Business Matters Consulting provides consulting and coaching to small and medium sized businesses and their owners to help them achieve their fullest potential.  For more information please visit businessmattersconsulting.com.

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6 Social Marketing Mistakes Business Owners Make

I’ll tell you right off the top: I’m not a social marketing expert. I have to work hard to create content, get followers and improve engagement. Many small business owners face this challenge. I do know this: 1. You don’t have to be a social marketing expert to get good results and 2: You should use social marketing as a part of your overall marketing strategy, not your only marketing strategy.

What I’ve learned isn’t about “hacking growth” or whatever is trendy. It’s about tested and true practices. Once you’ve created a repeatable social media model, you can use it to consistently develop and grow your brand. I’ve made a few mistakes while developing my own model. Here are some of them…

1. Don’t share with your network. Anyone with a successful social media program had to start somewhere – and that somewhere was probably with nothing. The first step is to let your friends and family know what you are doing. Don’t keep it a secret from anyone.  People, by their nature, want to help other people. Count on your personal network to be the starting point for followers, readers and likers. Enlist a few trusted friends to be your editors and proof-readers. Assuming you’re on Facebook with a few followers, consider posting an honest message that directly asks friends to check out your new page or website and specifically ask them to like and share your posts. Real friends and associates will happily oblige.

2. Change your message often, be inconsistent. I speak all the time about finding or creating a business model that works and then finding a way to repeat it.  My article on this topic was published not too long ago.  Please click here to read it. The message is just as true in marketing. Decide who you are and how you want to be perceived before you start broadcasting to the world. “Disruptor”, a trendy word right now, means someone who will break the mould, attack from different angles and become unexpected. While that is catchy and can have positive short term effects, if it distracts too much from what your core brand is it will only leave your prospects and customers confused in the long run.

3. Leave long gaps without activity.There’s no faster way to lose your followers’ interest than to not provide them with new content. Try to set yourself up on a schedule − again, repeatable consistency. Post new content on whatever schedule is suitable for your business, whether it’s daily, weekly, or bi-weekly, just make sure it gets done. People will get used to seeing new material from you at certain times and that is a good thing. If you like to work in flurries of activity or in the middle of the night, use a scheduling tool so your content is published when it’s the right time and people are looking. If you don’t have new content, be sure to keep your platforms active with quality and relevant re-posts. Share other’s work that your followers might find interesting and useful.

4. Don’t follow up. Now that you’ve been delivering great content and attracting some followers, they will start to respond. They will comment on posts, share your ideas and give you their email addresses to receive more. Now that you have their attention, it’s time to act. Thank people for their activity. Send them direct messages when it’s appropriate. Email material to those who gave you their addresses.  Create a personal connection that makes it just a little bit harder to turn away from. Not following up is like starting a conversation and not saying anything after the introduction. Keep talking! You are competing for your followers’ attention.

5. Don’t pay attention to peers, competitors or people smarter than you. You can learn something from everyone – so find out what it is. It is unlikely that what you are doing has never been done before. Research and find out the best practices of related businesses and your competitors. What are they doing that seems to be working? What can you learn to avoid from them? Look to leaders in your industry and see what they are doing. Better yet, ask them! Try to engage with them and get some good coaching and advice out of the connection. 

6. Use ONLY social marketing for your business. The point here is to look at the broader concept of marketing for your business. The reality is many people get caught up in social media as the only marketing they do. You can be disengaged and just sit behind your computer sending words out into space, but quality marketing has to extend beyond that. It has to make an emotional connection to drive activity. Make sure your marketing goes beyond Facebook, Twitter, LinkedIn and others. Different parts of your strategy support the others. Find ways to meet prospects face to face. Make it meaningful. Make it personal.

There may be a magic formula for successful social marketing, but I don’t know what it is. The marketing formula that has worked for me for more than 20 years of business ownership is a steady, consistent and quality brand message. Be engaging. Be interesting. Make social marketing personal.

I always appreciate feedback. Please feel free to comment. To find out more please contact me at businessmattersconsulting.com or of course at Facebook, Twitter and LinkedIn!