My Florida Business Broker

What Affects Your Business Value?

What Affects Your Business Value?

When you’re getting ready to sell your business, getting a broker’s opinion of value is one of the first and most important steps. An experienced broker will not only tell you what she thinks the business is worth in today’s market, but also help you understand why. 

Here is the list of documents I request from an owner to provide a valuation.

  • Business tax returns for the past three years
  • P & L’s and Dec 31 balance sheets for each year
  • Profit and Loss statement for the most recent period you have available (Preferably through the end of the month), ideally with the comparison of the same period of the prior year.  For example, 1/1/24 through 9/30/24 with a comparison of 1/1/23 through 9/30/23. We typically like to see trailing twelve months as well (for example, 10/1/23 through 9/30/24).
  • Current balance sheet to match P & L (for example, 9/30/24)
  • Estimate of typical inventory on hand at cost
  • Information regarding the company’s property lease: Monthly rate, expiration date, and square footage  – or provide a copy of the lease. If property is owned, we ask for a recent appraisal, if available, or in absence of that information regarding the property’s condition.
  • Estimate of the market value of the Furniture, Fixtures and Equipment (FFE).

Here is how I use financial information in a valuation.

First, I make sure the numbers make sense and match (tax returns and P&L statements, for example.) Then, I’ll ask for information about any one-time expenses (a specific legal fee, for example, or a repair that is not recurring.) I’ll also add back any personal expenses the owner might be running through the business (and advise against that for future bookkeeping.)

I look at the last three to five years of financial data and cash flow, using a weighted average, with the most recent year’s financials being more important than the previous years. A buyer and lender will ask for information during diligence.

With the financial information in hand, I can determine Earnings Before Interest Taxes Depreciation and Amortization (EBITDA): EBITDA is a measure of a company’s overall financial performance and profitability. The usual shortcut to calculate EBITDA is to start with operating profit, also called earnings before interest and tax (EBIT) and then add back depreciation and amortization. It’s an important figure for a buyer to understand in the due diligence process. 

For smaller companies, where a buyer will become the owner/operator, I solve for Owner Benefit (also commonly called Seller’s Discretionary Earnings (SDE): This is the amount of money a new owner can reasonably expect to earn annually after all company expenses are paid, before tax and debt service. 

Once I understand the owner’s true cash flow, we’ll ensure the employees’ salaries are normalized. That means we’ll understand what anyone in the business should make according to their job description and current labor market standards, so a new owner will know how much it will cost to replace their labor in the business. This happens often when a family member works for the business and may be over or underpaid for the services they provide.

I’ll also provide an analysis of occupancy costs, so a new owner can understand how much it will cost to buy or lease the property the business is housed in. We’ll value the inventory and working capital so we have a complete understanding of what the buyer is actually purchasing. 

My next step is to look at comparables, or comps, companies that are similar in size and in the same industry, so we get a feel for what buyers have been paying recently for companies like yours.

Finally, we’ll look at pricing the company based on a multiple of either EBITDA or SDE. 

The asking price has to meet the needs of the seller, of course, but, depending on deal size, it also must be a number that a lender will agree to. The cash flow of the company must cover the cost of doing business, provide a reasonable salary for the new owner, and cover the debt service of the loan. Debt service coverage ratios are usually a multiple of the actual loan payment, to make sure the new owner can cover the debt even if unexpected expenses occur. That ratio is often 1.25 – 1.30 times the monthly loan payment.

For business brokerage listings (as opposed to mergers and acquisition listings usually ~$1million or more in EBITDA), if the company’s cash flow can’t cover these costs, we’ll know we’ve priced the opportunity  too high. We may need to adjust the price to ensure a buyer can get financing for the deal. (That formula is dependent on a lot of factors, including how much the buyer puts down, and whether the seller will hold part of the note for a few years.) 

Selling a business is a complex transaction, one that most business owners only do once in their lifetime. That’s why I always recommend using an experienced business broker to help you understand the numbers and walk you through the process.

If I can help you understand what your business might be worth in today’s market, I do offer a complimentary and confidential opinion of value