A Business Appraisal’s “Reality Check”

As a business owner you might think the value of your business is $2,000,000. Where did you come up with that number? Well you have heard through the grape vine that your competitor got that for his business or you have read that your industry has a “rule of thumb” value of 1.5 times sales. What is the real value of your company and what should you do?

The obvious answer (not just because Business Appraisal Florida provides them) is to get a third party Business Appraisal that will value your business using 5-8 different methods and than weight those different values accordingly and provides a weighted value. But how do you check that final number to make sure it is reasonable and real? Any good appraisal provides a “Reality Check.”

What is a business appraisal Reality check? Just as the name suggests it answers the question does the value of your business make sense in the real world? For example purposes, you engage a business appraisal company to appraise your business and the resulting value is $2,000,000 and the average cash flow of your business is $475,000.

So here is where we compare this to real life. If someone was to buy your business for the appraised value of $2,000,000 they would probably use borrowed money. If they put 20% down ($400,000) and financed the balance at 7 years at 6.5 interest their payments would be $285,000 per year of principal and interest. Their lender wants approximately 1.25 times coverage on that amount which equals $356,000. So after debt coverage that would leave the buyer $119,000 or so for their salary and capital expenditure. Does this seem like a reasonable risk/reward to the buyer as their return on the down payment is approximately 47.5% and on their total investment ($400,000) 9.5% after debt coverage?

Well like many things in life, that depends. If your business has low client concentration and stable sales, earnings, and margins this is a good deal for the buyer. If 60% of your sales are to one large customer and you have had wild swings in sales and cash flow, then it might be pricey.

For more information about how to “Reality Check” your business’ value, please call Business Appraisal Florida at 561-325-9777 or use our contact form.