Every year, I look forward to the Inc Magazine issue where they produce this great graphic of what different companies are worth in the market place. It is a comprehensive guide to business valuation resources across 122 industries.
In my activities as a business broker, the first question I am always asked is “What do you think we can sell the company for?” My answer is always the same, “It depends“.
Ok, so the next question of course is, “What does it depend on?”. Only 2 things:
1. Your business is only worth what someone will pay for it. A strategic buyer (Some who already has a business in your industry) will find more value in the business than purely an economic buyer (Someone that wants to buy your business and run it alone). The strategic buyer will either merge it with their current business (cutting out cost and therefore find more value) or use your business to sell their products to your customers or sell your customers their products (therefore, find more value).
2. Cash Flow. The more free cash flow (ie money, not necessarily profits) your business generates, the more it is worth. The price is always a multiple of this number. Cash flow includes adding back in to the business all those perks and extra compensation you or your family take out that the new owner will not be required to.
Economic downturns are a good time to make acquisitions if you have cash on hand. Remember the seller always wants all their cash up front and the buyer wants to defer paying as much cash as possible into the future based on results. Depending on who I am hired by, I can argue both sides!
