How to Value a Service Business

How to value a service business? In this post, we will be exploring the best method on how to value a company in the business services industry sector.

Knowing the exact value of your company is crucial and there are several business valuation methods when it comes to determining the value of a service business.

How to Value a Service Business Quickly

Valuation methods usually use the worth of your company’s liquid assets, equipment, property, or anything else of economic value that your business owns. 

So which is the best business valuation approach to calculate the value of your service business?

According to experts, EBITDA (otherwise known as earnings before interest, taxes, depreciation, and amortization) is one of the best business valuation calculation for service companies. 

EBITDA business valuation method brings out a business’s operating performance. This plays an important role in determining the value of a company.

According to many business owners, EBITDA is very straightforward when it comes to calculating and determining a service business’ value. Another reason why this service company valuation method is preferable is that it is widely used by business sellers and buyers across the globe.

To calculate EBITDA multiples, you must first do some research to find the industry average multiples. An industry average multiple is a number to multiply your company's income, earnings, or EBITDA with.

Let's assume your professional services company has a revenue of $1m and an EBITDA of $350k. To calculate the EBITDA multiples, let's say the industry average multiple is 4x of EBITDA. The formula to calculate your company's worth will be: business worth = EBITDA x 4 ($1,400,00 = $350,000 x 4).

EBITDA Valuation Multiples for a Service Company

This business valuation calculation method excludes expenses such as tax, debts, among others, to portray a raw indication of a service company’s earnings, therefore, demonstrating its value.

There are two formulas you can use here:

1. EBITDA= operating profit+ depreciation+ amortization
2. EBITDA= net income+ interest + taxes + depreciation + amortization

Here is a more in-depth explanation of EBITDA’s components.

Interest

Interest is eliminated when calculating a service company’s value because it depends on its financial or capital structure. Since the capital structure varies from one business to another, the financial structure is always excluded to easily compare the value of different companies.

Interest, in this case, includes a company’s financial expenses, such as the interest rate on loans acquired from third-party lenders or banks.

Taxes

This component consists of any state, federal income, and local taxes imposed on a business by the government and other tax regulatory authorities.

Deductions

Deductions comprise any non-cash expenses that show a reduction in a business’ value.

Amortization

This component consists of expenses such as the cost of intangible assets.

EBITDA Multiples

This is an industry average multiple that can be found from industry publications or consulting with a valuation advisor.

This multiple is then taken and applied into a valuation calculation as demonstrated above. If this getting too complex for you, it is best to ask an expert to give you more insights about your specific industry niche and its average multiple to find your company's worth quickly.

Keep note that to get the best accurate valuations, you must apply other factors and use multiple calculations to come with a broker's opinion of valuation.

How to Increase Business Value in a Service Company

Any business owner would want to increase the value of their service business. Luckily, there are many ways to build up your business’s value. However, it is important first to identify what affects the value of your company.

Finances

This is one of the major factors that affect the value of your service business. So, how exactly do finances affect the worth of your company? For starters, how you control costs or expenses in your business significantly determines its worth.

Your business’s past, current, and projected cash flow and profits also play a significant role in determining its value.

Your Service Business’s Assets and Liabilities

This includes the value of your company’s properties and debtors.

External Factors

Some factors may be out of your control that could also significantly affect the value of your service business. These include the level of demand for your products or services, the level of competition, how similar businesses are valued, among others.

Strive to Boost Your Profits in your Service Business

Your company’s profits greatly affect its value because it will determine whether or not you will have people interested in investing in the business. Increasing your business’s profits mainly involves decreasing costs and increasing the sales revenue. 

One way to boost your company’s profits is doing away with unprofitable services or products. You can also aim at reducing the costs of supplies and strategically increase the prices of your products or services.

Work to Increase Sales and Reduce Expenses

One of the best ways to increase your sales is by improving your marketing strategy. You could also lower your business’s expenses by reducing production costs, lowering supply expenses, to mention a few.

Seek Advice From an Expert

This is important, especially if you are preparing to sell your service business. Hiring a professional business M&A advisor to help you correctly calculate the worth of your service business, can help you save a lot of time and can eliminate guesswork.

Can Hiring M&A Broker Help You Prepare to Sell Your Service Business?

There is a lot that goes into preparing to sell your service business. From negotiating with potential buyers to determining the exact value of your company. While you may know everything concerning your business, having an M&A broker by your side will help you navigate smoothly through the selling process.

Here are ways in which an M&A advisor can help you determine the value of your service business and sell it for the right price.

Helping You Understand Your Business Services Industry

Of course, you understand your industry, but an M&A advisor will help you know what makes your company unique. An M&A broker will also help you get acquainted with your industry’s current trends to help you better prepare your company for sale.

Helping You Conduct a Detailed Businesses Valuation

Determining the exact value of your business can help you know what to do to increase its value and determine the right asking price. An M&A advisor can help you calculate the true value of your business by conducting thorough research on your service company’s performance and finances.

Helping You Negotiate the Right Price for Your Service Business

No one will know how much your business is worth more than an M&A advisor. This is because they will take their time to evaluate your business’s performance, profits, and overall worth. An M&A advisor is, therefore, the right person to help you negotiate the perfect asking price for your company.

Service Business Valuation: Let the Experts Handle It

While there are many methods to determine the value of your service business, the EBITDA business valuation approach is recommendable. It focuses on a company’s operating performance, which gives a true picture of a business’s value.

Determining the value of your business will go a long way in helping you know what to ask for when selling your service company. While it can be an overwhelming process, having a certified M&A advisor by your side can make things easier and help you get your service business’s worth.

Download a business valuation sample: Download PDF

If you are a retiring business owner looking to exit your lower middle market service business in California, here are six tips to get you started:

1. Don't wait until the last minute to start planning your exit. The process of selling a lower middle market service business can take a long time, so it's important to start early.

2. Have a clear idea of what you want to get out of the sale. Know your goals and what you're willing to negotiate.

3.  Know what's your company's worth. This is an essential step to take when planning to sell your service business company in California.

4. Choose the right type of buyer. Not all buyers are created equal, so do your research and find the right one for your business.

5. Be prepared for a lot of due diligence. M&A buy-side due diligence is when buyers will want to know everything about your business, so be ready to provide documentation and answer questions.

6. Be flexible with the terms and conditions of the deal. It's important to be open to  negotiation to get the best possible deal for your business.

Rogerson Business Services, also known as, California's lower middle market business broker is a sell-side M&A advisory firm that has closed hundreds of lower middle-market deals in California. We are dedicated to helping our clients maximize value and achieve their desired outcomes. 

We have a deep understanding of the Californian market and an extensive network of buyers, which allows us to get the best possible price for our clients. We also provide comprehensive support throughout the entire process, from initial valuation to post-closing integration. 

Our hands-on approach and commitment to our client's success set us apart from other firms in the industry. If you consider selling your lower middle market service business, we would be honored to help you navigate the process and realize your goals.

If you have decided to value and then sell your lower middle market service company or still not ready, get started here, or call toll-free 1-844-414-9600 and leave a voice message with your question and get it answered within 24 hours. The deal team is spearheaded by Andrew Rogerson, Certified M&A Advisor, he will personally review and understand your pain point/s and prioritize your inquiry with Rogerson Business Services, RBS Advisor

Go to the next article: Part of tips to selling business services company in California series ->

More Tips to Help Sell a Lower Middle Market Business Services Company