The Limited Business Valuation: How to Know What Your Business May Be Worth

Do you know what your business is worth? As an owner, you might have an idea in your head about what it could or should be worth. Maybe your competitor recently sold their business, and you heard how much it sold for. Perhaps you have done some tax planning. You may have even been approached about selling your business or even received an offer. Whether you're considering selling your business, seeking investment, or simply want to understand its worth, a “limited business valuation” can be a tremendous resource. The Limited Business Valuation is included as part of our Exit Audit assessment to give a holistic view of your business's value and readiness for a transaction.

Learn more about an Exit Audit here: The Exit Audit: Your Compass to a Brighter Business Future (No Matter Your Exit Plan).

While comprehensive business valuations performed by a Certified Valuation Analyst are required in many circumstances such as tax planning, divorces, or business disputes, a “limited business valuation” focuses exclusively on providing streamlined insights about potential valuation if a majority sale were to take place soon. “Limited” simply means that it is solely for internal use.

This approach uses your business’s historical financial information, along with basic business valuation methodologies to come to a reasonable range of value that the business might be worth.

What this means is that we come up with a high and low end of what we consider to be a reasonable market value for your business.

How Do We Determine the Range of Reasonable Market Value For Your Business?

We love learning about your business.
We believe in your mission, core values, and story. 

Knowing the origins of your business, the gap you fill in the market, and the unique factors that set your business apart are invaluable. We will absolutely dig into these insights, but before we get the chance to tell your story to potential investors, your numbers will be what gets you into the room, and so with your numbers is where we will begin. 

First, we gather the financial information on your business - Profit and Loss statements, general ledger, balance sheet, and statement of cash flows among other pertinent items. We then analyze the numbers and look at the trailing twelve months (TTM) of financial performance. The most widely used valuations for business are based on a multiple of profits. Depending on your company or industry, we will typically look at either EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), Adjusted or “Normalized” EBITDA, or Sellers’ Discretionary Earnings (SDE). Adjusted EBITDA is the most widely used method of measuring profit of private businesses in our present age.

We often help determine a business’s EBITDA, Adjusted EBITDA, or SDE as neither of these financial metrics are found on a typical financial statement. To get a clearer picture of the company's earnings power, we adjust the financials for any non-recurring or non-operating items. This will exclude one-time expenses or income, as they may not reflect the company's ongoing performance. Calculating adjusted earnings provides a more accurate representation of the business's profitability (you can learn more about Normalizing EBITDA here).

From there, we pull data on available comparable companies – in terms of industry, size, and financial performance - that have transacted (meaning transitioned or sold). This helps us establish a range of multiples. For example, you may have ABC company that has $2M in EBITDA. Suppose we find that similar companies have historically transacted between 4 times to 8 times EBITDA, meaning that the range of value for a $2M EBITDA business would be between $2M x 4, or $2M x 8 for a valuation between $8M and $16M. If that seems like a wide range, it can be. So how do we place your business in this range?

Placing your business in a range of multiples is as much an art as it is a science. Historically, better-performing companies transact at a higher multiple, whereas poorer-performing companies transact at a lower multiple - if at all. From our example above, a company that has $10M in revenue and $2M in EBITDA at a 20% EBITDA margin in an industry that typically would have a 15% EBITDA margin, we could see that this is a high-performing business and would transact at the higher end of the range. We use our trusted network of investment banks to blindly validate our valuation thesis providing you with another set of eyes so that you can feel at ease that the figures we provide are as accurate as possible.

Other considerations will also affect where your business falls in the range, as well as the multiples for the range itself. Some common examples are the size of your business, customer concentration, owner dependency, geography, and industry among many other factors that will play a part in determining the valuation range. Placing your business in a range of values requires nuance and analysis. It can also offer a plan for value enhancement and acceleration.

Finally, we will provide a Limited Business Valuation written report with our commentary walks you through our findings. This will include the information reviewed, methodology used for the valuation, analysis of the business’s financial performance, and how it relates to the valuation, analysis of the business and industry, recommendations, and conclusions about what your business could be worth.

At the end of the day, what your business is worth is what a buyer is willing to pay for it. However, this process is how most buyers will determine the value of your business. If you’d like to get a better idea of where your business’ valuation stands, we would love to talk to you about your options. Learn more about “What’s Your Business Worth?”

If you’d like to learn how you can increase your business’s valuation, we here at Doescher Group are here to help.