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.
Across the Denver metro area, there are small businesses adding another page in the history of our region's success.
The Chamber’s annual Business Awards luncheon presented by Colorado Business Bank recognizes organizations in our community that make our region a great place to live and do business.
Get to know our Small Business of the Year finalists from their own voice, sponsored by Transworld Business Advisors.
Established: 1970
What we do: Colorado Barricade is a leading provider of traffic safety services and equipment for the road repair, construction and maintenance industry in the state of Colorado. Our core services include traffic-control planning and services, pavement marking, permanent sign manufacturing and installation as well as merchandise and equipment rental and sales.
Did you know:
Fun traditions with our team: We do an annual chili cook-off potluck and hand out a big, cheesy trophy to the winner every year.
Humphries Poli Architects, P.C.
Established: 1994
What we do: Our ideas inspire the spaces in which people spend their time, their energy and their lives. We support the creation of courageous visions, buildings and communities. With over two decades of experience bringing life to new, neglected and forgotten spaces, it is not enough to simply know the rules. Our business is knowing how far they can be bent.
Best advice received: Don’t settle for less than greatness.
If my business had a super power it would be: The ability to build more affordable and sustainable communities. We have this need because we live in a very precious place. We must learn how to balance the impact of what we create with the footprint that it left behind.
Established: 1998
What we do: Syncroness provides inspired solutions to highly complex business and technical problems in the medical device, aerospace and machine solutions industries. We offer engineering services aligned to the entire product lifecycle to accelerate product development and drive more predictability and productivity.
Best part of the day: Our favorite time of day is our 4 o’clock show ‘n tell with beer and nachos. Our teams present their projects to the company to share the exciting creative work we are doing. The beer and nachos are great, too!
We love having our business in Colorado because: Colorado has so much to offer, and in response to our employees’ feedback, we have a 9/80 work schedule to allow our teams to have a better work-life balance. The Colorado culture and creative spirit inspires us to keep providing innovating solutions.
Join us on Friday, April 29, to see the winners announced live at the 2016 Business Awards.
Maggie McEntee is the digital communications and brand manager for the Denver Metro Chamber of Commerce.
