I frequently interact with business owners and the many professionals that serve them. I see situations where misinformation about the value of a company is taken as fact. People inaccurately use industry averages, multiples of revenue or EBITDA, or some other metric to calculate a business value mistakenly. In some cases, an owner literally just picks a number out of the air.
When it comes to estimating the value of a business, knowledge is power. Guessing can cost business owners a lot of money.
For example, one business owner let’s call him Jack recently told me he wanted to buy a competitor in town. Both were family-owned businesses with established track records. Jack was told that businesses in his industry sold for one times revenue. Since the business he wanted to buy had $1 million in revenue, he believed it was worth $1 million. Furthermore, he said his business also had $1 million in revenue, therefore, he believed both businesses were worth the same.
I suggested this was not the best way to value the business. I asked him what his net income was for the year. He replied, “About $100,000.” Next, I asked “What is the net income of the target company?” His reply, “About $300,000.” My next comment was, “Without doing any further analysis, let me suggest to you that the target company is worth more than your company and that its value is higher than $1 million.” He disagreed and was steadfast in his belief that both companies were worth the same value, $1 million, or one times revenue.
Which company do you think has more value? Company A with net income of $100,000 or Company B with net income of $300,000? All other factors being similar, which would you pay more? Of course, other factors contribute to value, but let’s keep it simple for now.
To help business owners better understand business value, I developed the Business Value Estimator, a helpful tool that gives you an idea about where your business value is today. If you don’t know where you are today, how will you reach your goals tomorrow?
Download the Business Value Estimator for free by clicking on this link.
Within minutes, you can insert your own company data and have an estimate of your business value.If you have any questions, please contact me.