What is Your Business Worth? Different Factors Affecting Business Valuations

There are a lot of commonly used profit multipliers to determine the value of a business.  You may have heard of 2 times the profit, or three times the profit, but do they apply to your business?

The short answer is no, a Business Valuation is affected by non discrete factors, including the following.

The reason for this is that there are too many variables in the phrase ‘2 times multiplier of the profit.’

Effect of Industry Type on Business Valuations

The first variable is type of industry.  Different industries command different multiples.  So while your friend’s business may have sold for one and half times multiple of the profit, yours might be worth a 3 times multiplier of the profit.

Different Definitions of Profit Affect Business Valuations

The second variable is the definition of profit.  Does it refer to the bottom line profit reported on recent tax returns?  But what about your write-offs that are not necessary for the successful operation of your business?  How do you account for the profit that you have reduced via these write offs?  Getting to that, do these business valuation multipliers refer to the SDE, EBITDA or some other profit formulation.  What are SDE & EBITDA?  In short, they are the profit of the business with adjustments for write offs.  Each business valuation formula relies on differing definitions of bottom line profit, which means it definitely isn’t as simple as saying ‘2 times multiplier of the profit.’

FF&E’s effect on Business Valuations

What about the machinery & equipment that your business owns and needs to operate successfully?  How are those factored into the business valuation formulas and multipliers?  Generally speaking they are accounted for the valuation multipliers, but can require a separate examination depending on the industry and the level or revenue and profit.

Organizational Structure’s effect on Business Valuations

A third variable is going to be the employee structure of the business.  In short, how many hats is the owner wearing?  An owner wearing more hats, leads to downward pressure on the multiplier, which reduces the Business Valuation.   Conversely, redundancy in staffing obviously reduces profits, but can be viewed as a positive for valuations since payroll reductions can be adjusted and accounted for.  However, accounting for projected, hypothetical changes comes with the caveat that it isn’t based on actual present day numbers, which means that these hypothetical projections get discounted.

For assistance with a Business Valuation for your business contact our office for an appointment.  You can reach our Client Care Manager Sonia Chhabra at  (888) 926-9193 or email cs@justelementary.com