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Help! What Is My Business Really Worth?

October 6, 2010

Published in Nanaimo Magazine September 2010 Issue.

To view the published article: http://www.downtownmagazine.ca/nanaimo/nanaimomag.php

Popular approaches often used to value a business are Income, Asset, and Market methodologies. There are five different Income methodologies, in each case businesses are valued based on company earnings. Buyers’ main concern is the true or absolute income of the company. The net ordinary income, reported on the profit and loss statements for tax purposes, does not depict the true earnings of the company based on non-cash, discretionary, & non-recurring items expensed by the owner.  Reported earnings are usually intentionally kept low to manage taxes. Therefore, to determine the true earning capacity of a business, the profit & loss statements must be re-cast during the valuation process. The business value is then calculated by applying a multiple, consistent with the industry and a weighting of the factors affecting the business, to the SDE or adjusted EBITDA.

Seller’s Discretionary Earnings (SDE) is generally utilized for businesses under $1 million in earnings. Typically, these businesses are owner-operated, the owner receiving a salary through the company.  It is important to determine the ‘owner benefit’ as opposed to the ‘earnings’ of the business. Add-backs or normalizations are applied to the pre-tax business earnings and expenses to adjusted fair market value.

Earnings Before Interest Taxes Depreciation Amortization (EBITDA) is generally utilized by larger companies with income in excess of $1 million to define the earnings of the company.  In most cases, the owner/investor does not actively direct the company operations and pays a general manager to perform that function.  Therefore, the EBITDA calculation differs from SDE as it includes the manager’s compensation in the earnings calculation as an expense.  EBITDA is a good measure of core profit trends because it eliminates some of the extraneous factors and allows a more “apples-to-apples” comparison.  However, EBITDA should not replace the measure of cash flow, which includes the significant factor of changes in working capital.

These methodologies all use historical data and do not account for the current cycle or health of the industry in the current economy, nor do they account for the condition of the geographical area the company services. These two factors are the other important considerations in each valuation analysis provided by BC Business Brokers. To develop a full picture of the health of any given firm, a multitude of measures must be taken into consideration.

BC Business Brokers receive in-depth training in the 12 common accounting methodologies of Business Valuation through the IBBA University (International Business Brokers Association), have prior business ownership experience, and are provincially licensed and regulated.  If you are contemplating the sale of your business, or may be considering small business ownership, feel free to contact the Sunbelt Nanaimo office – we can help you.  Visit our local website at http://www.bcbusinessbroker.ca or www.sunbeltnetwork.com/vancouverislandor phone 1-877-289-0969.

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