There are thousands of businesses for sale throughout the United States. Buying an existing business requires valuing the business, placing an offer and getting it accepted. The best way to determine value varying depending on the business model, assets, clientele and potential growth. As an entrepreneur, you should make a fair offer to get a seller to accept while maximizing your upside. This requires determining the value of a private business quickly. Additionally, you may have to account for timeframe to get your offer accepted. In this post, we’ll show you how to value a private business for sale quickly.
Calculate Your EBITDA
First, the value of a business for sale will be impacted by the EBITDA. This calculation stands for the company’s earning before interest, business taxes, depreciation and amortization. The EBITDA is different from net profit, since it does not factor in taxes and other expenses after the bottom line. For example, if goods are bought for $0,000 and sold for $100,000, the EBITDA would be $30,000. When planning to purchase a business, you should assign a multiple to this calculation. Depending on the industry, the seller may want a 3x-5x multiple. Of course, businesses for sale that have a strong track record may demand more than 5 times EBITDA.
Record Book Value
Next, record the book value to determine the value for purchasing a business. To calculate the value of the business, add up your business assets and subtract all liabilities. Business assets may include cash holdings, real estate, or inventory. Assets may also include equipment, machinery or software required to run the business. Liabilities cover any debts, mortgages or loans to the company. The difference between assets and liabilities gives you a clear business value. This “book value” approach can be used to negotiate against a seller who is asking for a high valuation for sale.
Evaluate The Market Value
Additionally, businesses for sale can be valued based on the market. Quickly, you can look up the valuation of other business transactions in the industry. Especially for technology business, the market based approach can offer assistance in getting a current price. Likewise, you can find traditional private companies that have recently sold under market value. Typically, you can use data from practitioners in the industry who worked on these business mergers and acquisitions. They can offer valuable insights to value the business for sale. Further, you can reach out to other businesses for sale that recently went off market. Using the market based approach, you can determine a comparative price for the business sale.
Follow A Rule Of Thumb
For the fastest business valuation, consider using a rule of thumb pricing model. This valuation process works quickly to get a ballpark figure on a business. The business for sale will ultimately sell for the supply and demand of the market. However, you might find that these rule of thumb ideas can get you pretty close to the purchase price. A popular role of thumb is a percentage of sales. Instead of calculating based on earnings or income, sales or revenues are fixed figures. You can choose to add a multiplier to the sales or simply take a percentage of the last 12 months of sales. Following a simple rule of thumb is a quick way to make a judgement call based on revenues only.
Value The Cost To Substitute
To accurately calculate the value from your private business, you should analyze the cost to substitute. The cost approach is primarily based off concepts from the Principle of Substitution. This theory states that prudent buyers will not pay more for an asset, when a cheaper substitute utility is available. From a business perspective, you cannot expect an angel investor to purchase your company if there are more-affordable, comparable organizations for sale. Therefore, you should consider the value of substitute or competing businesses that are currently listed. Then, you can document their values and modify accordingly. Certainly, analyze the cost of substitutes to accurately determine value for your private business.
Using these simple methods and approaches, you can value a private business for sale. Start by calculating the company’s EBITDA and adding a reasonable multiplier for the given industry. Or, consider the company’s underlying assets and cash on hand with the book valuation strategy. For high tech businesses for sale, you may have to use a market-based valuation to compare similar transactions. On the other hand, make a quick business valuation based on rule of thumb, or total sales. In other cases, you should factor in the cost to substitute the business, which can give you a fair price to negotiate from. When evaluating a business for sale, follow these steps to calculate a fair value to make an offer.