As a business owner, you may think your business is worth $2,000,000. But how did you come up with that amount? Well, it’s not enough that you’ve heard through the grapevine that your competitor got that for his business, or you’ve read that your industry has a “rule of thumb” value of 1.5 times sales. So what is the real value of your business and what should you do?
The obvious answer (not only because they are given by Business Appraisal FL|GA|HI) is to get a third party Business Appraisal that values your business using 5-8 different methods and then calculates those different values accordingly and delivers a weighted value. But how are you going to verify the final figure to make sure it’s fair and real? Any good assessment shall provide you with a “Reality Check.”
What is a Certified 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:
Should someone were to purchase 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, it depends. If your business has low client concentration and stable sales, earnings, and margins, then this would be 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.