How much is a business worth? It’s a critical question for buyers and sellers alike. Unfortunately, there is no one simple explanation because valuation is more art than science. There are, however, multiple methods for determining the value of a small business, each with their own application.
First, let’s look at the four different types of value that can be determined for a small business.
We’ll look at how to arrive at the fair market value of a small business using the following approaches to valuation.
THE ASSET APPROACH. The asset approach values the assets of a small business minus liabilities, using methods like book value. These values usually do not translate to the market value of most operating businesses; therefore, the asset approach does not properly represent the value of an ongoing business with positive earnings. This approach may be a good tool for businesses with declining revenue
THE MARKET APPROACH. The market approach uses comparable sales data to determine the value of a company of a like business in size and industry. There are multiple trustworthy databases where appraisers can find multiples of gross sales and earnings to compare to a business. This method is reliable in most cases and is a strong indicator of fair market value.
THE INCOME APPROACH. The income approach determines the present value of the income stream it will bring to a buyer using several complex calculation methods. This approach is also a strong indicator of a business’s fair market value. These methods use future projections of growth to identify what the business may be worth, and, oftentimes, historical earnings are a good indicator of future earnings. So essentially, in the income approach a business is worth a multiple of past earnings.
How is a Multiple Determined? In small business mergers and acquisitions, the multiple will likely be between one and three. For larger companies, with earnings before interest, taxes, depreciation and amortization greater than $1 million, the multiple can be between four and six. Multiples generally grow with business size, quality and the verifiability of the owner’s benefit.
Remember when we said, “Valuation is more art than science?” That’s because all of these business valuation approaches aside, the same business can be valued differently by each buyer. And a business’s valuation is dependent on a number of factors like the location, size, competition, growth rates, industry trends, quality of books, ease of transfer, control issues, time available to sell and the terms of the sale – and this isn’t even an all-inclusive list.
Because a business’s value is often subject to fluid factors like the economy and industry trends, it is best to leave its determination to a professional transactional advisor. Their access to comparable databases and understanding of the market cycle positions them well for developing an accurate representation of a company’s value.
Jessica Fialkovich is the president of Transworld Business Advisors - Rocky Mountain. Transworld is the top business brokerage firm in Colorado, listing 200+ businesses for sale annually. Transworld assists visionary entrepreneurs with buying a business or selling a business in Colorado, specializing in helping family-owned and closely held businesses with their strategic plans. Through their partner, Transworld Commercial Real Estate, Transworld also advises clients on commercial real estate acquisitions and dispositions.
Metro Denver is a great place for small business. According to a recent Paydex market report, Denver remains one of the top four metro areas in the country for creating jobs—making Denver one of the fastest-growing metropolitan areas in the United States.
This is great news for business owners, who arrive in droves from cities like Chicago, New York City and the San Francisco Bay Area to pursue their professional passions like wellness, interior design, wine making or even real estate. The trick is identifying when you’re ready to take the next growth opportunity and ensure your business is in a position to take advantage.
Is Your Business Ready to Grow?
Savvy business owners understand growth is essential to keep their businesses alive and thriving, particularly in a strong market like Denver. Can you tell if your business is ready to take it to the next level? Here’s a good place to start:
After you have identified you’re ready to grow, there are options that exist to help you.
Gaining access to capital ideas
Ty Kiisel is a Main Street business evangelist, author and marketing veteran with over 30 years of experience. Ty has been writing about small business and small business finance for OnDeck since 2014. He endeavors to make the maze of small business lending accessible by weaving personal experiences and other anecdotes into a regular discussion of one of the biggest challenges facing small business owners today.
As a small business, you probably don’t think automation or artificial intelligence will have an impact on your business. But take it from three small business leaders who work in the tech space – it will, and now is the time to learn how you can get ready (and make the most of tools already available).
Take administrative tasks off your to-dos. Would you rather work on day-to-day items or your business’s goals and strategy? The reality is that the average entrepreneur spends 68.1 percent of their time on the day-to-day and 31.9 percent working on goals and strategy, according to a survey from The Alternative Board. That’s why at SALT, Bill Sinclair’s team uses tools like Clara Labs to automate appointment bookings and Lattice to add customer feedback to the staff’s performance reviews.
Create a culture that’s quick to adopt, quick to adapt – but stay true to your goals. There can be so many tech options out there, that it can be easy to get distracted “shiny object syndrome,” says Tinman Kinetics’ Frank Trevino. He should know – his company was born out of the IBM Watson AI XPRIZE, and they work to empower small and mid-sized businesses with software they need to work smarter. But, he cautions that technology can’t substitute for focusing on your people and your process.
Don’t forget the foundation of your business. That means not forgetting the human element, no matter what you automate in your business. Mark Spiecker is building a pharmacy where prescriptions will be filled by robots. While that will make STAQ Pharma different from pharmacies across the country, he says that the relationships that make his business run are still key.
Want to hear more? Join us at State of Small Business on Wednesday, Nov. 7.
Sara Crocker is the communications manager for the Denver Metro Chamber.
In the marketing world things are always evolving – from the most-loved social platform to the average length of a video. But you don’t have to go through all of these changes alone (or spend a ton of money)!
We compiled our favorite free marketing resources to make your day-to-day tasks easier and more efficient. Check out our eight marketing resources:
Blogging: You can be your own media outlet, sharing your expertise in your field, and your blog is your content hub. While direct traffic is growing again, there are a number of places that can refer people to your amazing content. In addition to your blog, you should consider reposting your content to LinkedIn using its blogging feature or Medium. It’s a quick easy way to repurpose your content and reach more people.
Email Scheduling: Design your emails to represent your business’s brand with MailChimp. This email marketing tool allows you to create email templates, schedule emails in advance and even segment your email list (segmented campaigns have a 55 percent higher click rate than other campaigns). MailChimp’s forever free plan allows you to send up to 12,000 emails per month and have 2,000 subscribers on your list. One helpful hint: MailChimp offers marketing guides from Instagram to website landing pages. They are a one-stop shop for marketing.
Design Tools: Want to keep your brand’s graphics fun and engaging, but don’t have an in-house graphic designer? Play around with Canva – a free design tool to create social media, email, marketing materials and more. This tool is easy to use and stores all of the graphics you create. And, if you have little to no design experience they have tutorials to get you started.
Photography: Are you always searching for that perfect photo? Whether it’s a business meeting or humorous image, Pexels has you covered. This tool has some of the best free stock photos all in one place. With over 40,000 photos you’re be sure to find just the image you need.
Social Media Scheduling: Keep your social profiles active without the daily fuss. Hootsuite is a content scheduling tool where you can queue up posts, set it and forget it. The free version allows up to three different accounts, and is usually robust enough for a small business, but there is always an option to upgrade. Basic analytics are included in the platform to give you a better idea which posts spark the most engagement. Need a social media crash course? They have that, too.
Video Editing: Smartphones have made shooting short, fun videos simple – and if you want to be seen on social media it’s becoming an essential for any brand. While the tools to edit straight from your phone are getting better, we personally like free tools like iMovie for Mac users and Lightworks on a PC.
Website Analytics: Google Analytics is a free tool that provides real-time data that help you understand your website performance, such number of users, where they are coming from and what they’re clicking on. As a business owner or a marketer, it’s important to capture and analyze this data to inform your sales and marketing efforts, and focus on what’s most profitable. Check out Google Analytics for Beginners to get started with free online training. If you’re a nonprofit, see if you are eligible to take advantage of Google Ad Grants for in-kind AdWords advertising to get your organization seen in Google Search.
More Marketing Resources: If you need access to an expert or have a specific, unique challenge, reach out to Chamber affiliate, the Denver Metro Small Business Development Center. They offer no-cost, confidential consulting with industry experts to tackle your wickedest business challenges. Find a consultant.
Colorado is one of the most vibrant economies in the nation – ranked as the best place for business and careers two years in a row by Forbes; ranked sixth in the nation for best state economies by WalletHub and is home to one of the nation’s smartest, most fit workforces. When we look at the businesses who power our economy, small business is big business in Colorado. They employ 1 million Coloradans – nearly half of the private workforce.
That’s why the Chamber and the Denver Metro Small Business Development Center are celebrating small business at State of Small Business on Nov. 9. Not only will small business be highlighted, but you’ll hear from Patty Silverstein, president and chief economist of Development Research Partners, on her economic forecast and trends that small businesses should pay attention to in the coming year.
Here’s a sneak peek at the questions businesses should keep on their radar:
What industries are expanding in the Denver metro region?
“With the exception of the fossil fuels industry, all of our industry clusters expanded in 2016,” said Silverstein. “The fastest growing industry was IT-Software, which grew by nearly 9.5 percent!”
Did you know the entrepreneurial spirit fuels this industry? They employ 54,000-plus works at 5,180 companies in the Denver metro area. And, Colorado was ranked as the second-best state for tech in 2016.
When will home prices slow?
“We are starting to see some tempering in apartment rental rates as more units open. However, single-family home prices continue to increase at a very rapid pace,” Silverstein said.
Did you know the 15,000? The Chamber has been a vocal advocate for finding affordable housing solutions. This past legislative session, we took a step in the right direction in providing affordable housing – developers now have more efficient ways to resolve issues.
How are the commercial real estate markets doing?
“There are cranes everywhere! We saw more office, industrial and retail square footage added in 2017 than ever before,” said Silverstein. “While vacancy rates are inching up for most product types, the real estate markets continue to be healthy and resilient.”
You just need to look to the sky to see how Denver’s commercial real estate market is thriving. With 35 cranes Denver has the third-most cranes among major U.S. cities.
Join the Chamber and the Denver Metro SBDC at State of Small Business on Nov. 9 to hear from Silverstein on trends to keep top of mind. You’ll also hear from a panel of innovation experts on small businesses in Colorado that are leading the nation in innovation.
Laura James is the marketing and communications coordinator for the Denver Metro Chamber
