What is my business worth?
By Adam Friend | Senior Vice President of Business Development
This is the most common question we get, and unfortunately, there are no simple formulas. Business valuation is a complex subject and the only honest answer is that it depends on a number of factors specific to your company, and also on certain aspects of the particular buyer. First and foremost, the value of your business is based upon the cash flow (typically represented by EBITDA) of your business that is expected to be generated by the buyer after sale. To estimate that figure, buyers typically look at accrual-based EBITDA in the trailing twelve months prior to closing (or the latest period available), as a proxy for the cash flow of the business.
Importantly, the EBITDA relevant for the valuation is what the buyer will achieve under their ownership, not what the owner earned historically. The buyer will make adjustments to account for the impact of any expected changes post-closing. As such, it is important to consider what the owner salary will be post-closing (if any), and what revenue might go away under new ownership. For example, if there is contractual revenue that doesn’t transfer, small-business related revenue that won’t continue, or relationships that aren’t expected to or don’t continue post-closing (such as referrals from other agencies), then the valuation will be impacted by those changes. Additionally, if the seller engages in marketing or pricing practices that are inconsistent with the buyer’s policies or practices, then that may impact valuation as well.
Once the buyer has determined the expected cash flow of the business, then typically a multiple is applied to that figure. The multiple can vary widely depending on a number of factors including: expected future growth of the business, size and stability of the business, risks associated with sales reps or reporters with books of business, customer concentration, or other factors that might impact the future cash flow of the business. The only way to truly understand how a buyer will value your business is to provide enough information for them to make their own assessment, which does not take significant time or require you to divulge confidential information.