How to Value My Business to Sell?

Putting a price on your lower middle market business in California, especially when selling it, can be a challenge. You want to ensure you get what you deserve for building the enterprise for years and exactly what it’s worth. But this can get tricky because what you think your business is worth may not be what the buyer considers it's worth. 

Suppose you’re selling a business and wondering how to value a business to sell in California. In this case, Rogerson Business Services, RBS Advisors, can help you value and sell your business in the lower middle market  at the best price.

Read on to learn how to assess your business’s value and determine fair market value.

How to Value My Business to Sell Quickly

In this particular case, you’re coming up with the basic worth of your company to sell it. If you’re looking to sell it as quickly as possible, you can use tangible assets and current liabilities in your valuation.

Tangible assets are the items your business possesses that you can dispose of or sell them reasonably fast. They include equipment, investments, inventory, receivables, and cash. 

On the other hand, intangible assets include code exceptions, goodwill, company name, zoning variances, trademarks, recipes, and logos. These and other assets of value to your specific firm or buyer are not easy to sell.

Liabilities include loans, payables, debts, mortgages, contracts, and leases.

The Formula

You can quickly find your business value before selling by considering your tangible assets and current liabilities. You just need to look at your firm’s balance sheet.

A balance sheet has all the assets and liabilities of a business, indicating its worth. Depending on the type of business you own, the list may include tangible and intangible assets and various long-term liabilities.

You can reduce most of these through negotiations or terminating some agreements in advance. 

If your balance sheet seems complex, you want to make a fast sale and are wondering, “How much should I sell my business for,” here’s the solution. Take the quickly-sellable assets and subtract the liabilities. You’ll get the net worth of your business. That’s how to value a business quickly to sell your business as soon as possible.

• Business net worth (net assets) = Tangible assets – Current liabilities

Ensure to update your balance sheet when using this approach so that you can factor in factors like depreciation and inflation.

It’s worth noting that although finding the net assets value is an excellent place to start and helps you sell the lower middle market company quickly in California, the formula does not consider intangible assets.

Multiples of Earnings Method of Valuing a Business

Multiples of earnings is a business valuation methodology that entails applying a multiple to your company’s profits.

This business valuation formula uses EBIT (earnings before interest and taxes) in most cases. But some companies also calculate their earnings as EBITDA (Earnings before interest, taxes, depreciation, and amortization). 

For instance, if your business earnings are $500,000, you can use a multiple of two. That means you’ll value your business at $1,000,000.

• Multiples of earnings (value for sale) = Earnings (EBIT/EBITDA) * multiple

Some national standards apply to various industries and businesses and help determine the appropriate earnings multiple for a particular company. One such merit is business size. Another is the predictability of revenue.

Other factors that come into play and influence what the buyer pays include: 

• Strong management
• Market leadership
• A company’s operating systems
• Reliability of the financial reporting system
• The makeup of the customer base
• Growth opportunities
• Strength of cash flow
• Intangible assets
• Scalability

Using Multiples of Earnings to Value Your Lower Middle Market Business

Before you can decide whether or not to use multiples of earnings method to value your business when selling it, ensure the following:

• Know what to include and not include in your earnings.
• Identify the appropriate earnings multiplier for your lower middle market business in the multiples of earnings equation. You should explain to prospective buyers convincingly why you used that multiplier.
• When determining the multiple to use, research the most common or average earnings multiple in other businesses operating in your industry.
• Consider other factors besides the multiple that come into play when using this business valuation method. 

Net Income Multiple Method of Valuing a Business

Income-producing businesses on sale use a ratio or factor known as Net Income Multiplier (NIM) when evaluating the market value of the lower middle market business or property in California. In short, this method is all about calculating the multiples of net income.

The Formula

To calculate multiple net income, multiply your net operating income (NOI) by the net income multiplier (NIM) to calculate multiple net income. You’ll arrive at your business’s market value at which you’ll sell.

• Market Value/Business Value (Multiple Net Income) = Net Operating Income X Net Income Multiplier (NIM)

                                                      = NIM X NOI.

An Example

Recent business sales of similar lower middle market companies in California to yours record the average net income multiplier as 7. The net operating income of your property or the business you’re considering selling is $30,000. What is the market value of your business?

• Market Value = $30,000 X 7 = $210,000

The multiple net income for your business is $210, 000 and this is the price at which you should sell your business.

When using the net income multiple method to estimate your lower middle market business value, ensure to use accurate and current financial data for similar companies sold recently.

Using Valuation Multiples to Value a Business in California

This method of determining the net worth of a lower middle market business calculates its market value based on the ratio of one or several key business metrics to the known values of companies similar to yours. 

By incorporating numerous metrics or financial characteristics into a net income or valuation multiple analysis, it’s easier to reflect the totality of your business.

It’s worth mentioning that some of these metrics apply in one business or company more than another. You express these multiples as a ratio. Therefore, you should determine which ratio gives you a stronger directional sense of your business value.

For example, you can use EV (enterprise value) or (EBITDA – CapEx) multiples to value a capital-intensive business (such as a cable company). 

However, this would not be suitable for a consulting firm. Look for equity research reports of companies comparable to yours, and you’ll see what multiples analysts are using and apply the same to your lower middle market business.

Keep in mind that you have three choices when deciding on the business metric to focus on when leveraging valuation multiples. These must apply regardless of the specific metrics relevant to your industry. These choices include:

• Valuing revenue vs. profit: You have to decide whether you focus more on revenue or profitability. In most cases, new businesses in their early stages of development focus on top-line revenue. On the other hand, more mature companies prioritize profit and unit margins.
• Valuing historical results vs. forecasts: Empirical evidence points that forecasts or forward-looking multiple tend to be more precise and accurate in predicting business value than historical results.
• Current results vs. growth rates: When using a company’s growth rate to determine its worth, you must use it with the most recent data.

Valuation Multiple Formulas

The most common formulas you can use to calculate valuation multiples are:

• Revenue-based formulas: EV/ Revenue or Price/ Sales
• Profit based formulas: Price/ EPS

First, you need to understand that the numerator of the fractions you use in net income or valuation multiples is always a business value. An example is the price-to-earnings (PE) ratio. This value is the best-known multiple of all and is the ratio of your firm’s earnings per share (EPS) to its share price (Price/EPS).

The denominator is the business metric you intend to focus on in your analysis. For instance, it’s the earnings in a PE ratio.

All you need to do is transform the PE ratio into a multiple, then use the multiple in your analysis. Multiplying both sides of the simple equation by your business metric will achieve the transformation. You’ll get this new equation:

• Business Value = Business Metric X the Multiple.

In short;

Numerator/ Denominator = Ratio = Business Value/ Business Metric = Multiple

An Example

On June 30, 2021, your company’s shares closed at $40. At the same time, its EPS was 3 for a PE ratio of 20. Putting these numbers into the equation above, you get:

$40 = 3 X 20

If your firm had $1.5 million shares outstanding in October 2021, then its total valuation or market capitalization was:

$40 X $1.5 million = $60 million.

Hire an M&A Advisor to Help You Value Your Business in California

Valuing a lower middle market business is no easy task, especially for the business owner. Employing the most suitable business valuation approaches, hiring an M&A advisor, and considering the factors to increase value are all great ways to stay on top.

M&A advisors help lower middle market businesses in California prepare company valuation reports using the various business valuation techniques discussed above. That way, companies can arrive at the most accurate and up-to-date value. 

An M&A advisory firm will also walk with you step by step throughout the sale process, making everything easier for you.

If you are a retiring business owner looking to exit your lower middle market business in California, here are five 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 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. Choose the right type of buyer. Not all buyers are created equal, so do your research and find the right one for your business.

4. 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.

5. 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 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 business 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 Advisors

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