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Valuing Your Business

VALUING YOUR BUSINESS

If you are thinking of selling your business, the value that you place on it is extremely important. First, the price that you advertise it at is going to determine the response rate; the higher the price, the lower the response rate, and the longer it will take to sell. But more importantly, the price that you actually receive for your business is going to impact the quality of your retirement and the value of your estate.

Buyers today are very sophisticated, and it is highly unlikely that an unsophisticated person will purchase the business at a price that is substantially above fair market value. Additionally, if there is a financial institution financing a portion of the transaction, it will invariably require that an outside valuation firm perform a valuation; valuation firms are extremely knowledgeable, and they apply a variety of quantitative techniques developed on Wall Street and in academia to your financial data to arrive at a conclusion of value. The financial institution will accept the valuation firm’s conclusion of value, and you will not be able to negotiate a different amount. There is nothing that helps to kill a deal faster than a buyer and seller agreeing upon a price, and the valuation coming in at a lower number.

For many small businesses, there is a so-called going rate. For example, childcare centers presently are selling for between 2.5 and 3.0 times seller discretionary earnings, depending upon the size of the center, how long it has been in business, and the age configuration of the children enrolled. Likewise, gas stations are presently selling for 1.5 times seller discretionary earnings; if there is a convenience store included as part of the sale, one can expect a multiple of approximately 2 times discretionary earnings.

For larger enterprises, there is no “going rate” and one needs to apply valuation techniques to arrive at a value. Generally speaking, the income method is the preferred valuation technique, and the two standard valuation methodologies within the income method are discounted cash flow and capitalization of earnings.

Crown Business Brokers, LLC is expert at valuing small and mid-sized businesses and Brad Palmer, C.P.A. has testified numerous times in N.J. State Superior Court regarding valuation related matters. If you would like a cost free consultation, please contact us at (908) 931-9300.


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