One of the main challenges a business broker faces with a new client is the business valuation. A business broker is trained to be able to develop a Broker’s Opinion of Value that represents the Market Value of the business. Various valuation techniques are used to evaluate and quantify the following three basic elements of value in an ongoing business: Cash Flow, Growth, and Risk.  In other words, what your business is worth depends on the cash it generates today, how much cash it’s likely to deliver in the foreseeable future, and the return any buyers would require on their investment in your business.

A good broker will gain the trust of the business owner so that what is represented to the broker is as close to reality as possible. It is important to identify all discretionary expenditures that a new owner may not make. The Market Value of the business is underpinned by the adjusted earnings before taxes, interest income or expense, non-operating and non-recurring expenses, depreciation and other non-cash charges and prior to deducting an owner’s /officer’s compensation. The due diligence of a buyer must support these add-backs to the Discretionary Earnings of the business.

Finally, the Market Value of the business is determined by comparing the Discretionary Earnings of the client’s business with other businesses sold recently with similar earnings, in similar industries, in a similar geographic location and with similar intangibles such as lease terms and financing options. This comparison results in a range of multiples to be applied to the Discretionary Earnings. The business value then is somewhere in this range.

by Paul Visokey, Partner

Topics: business valuations