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What Determines Your Business's Value

There are many factors that purchasers use to determine what they are willing to pay for a business.  I'll list several below but the #1 starting point is Earnings Before Income Taxes, Depreciation and Amortization (EBITDA).  There are some variations of this measure including excluding rents and Free Cash Flow but I'll stick with EBITDA for now.

 

Typically you will hear purchase prices expressed as a "multiple" of EBITDA.  You may have even had a friend say, "I got 8 times EBITDA for my funeral home."  There's a little more to it than that but it is the primary factor in most sales.

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So back to the "selling $1 bills for $10 each" thing.  Purchasers usually look at the prior 3 years' financial numbers when determining your EBITDA.  If you can add an additional dollar to EBITDA (either through incremental income or cost savings) you get to keep that dollar PLUS it gets multiplied by the multiple of EBITDA discussed above.  I've seen funeral and cemetery businesses sold for 5 times EBITDA (low) and 18 times EBITDA (sky high).  For purposes of our continued discussion, and to make the math easier, let's use a multiple of 10.

 

If you cut $1 off of your business meal expense for the next three years, you'll have $3 more in the bank AND MORE IMPORTANTLY, your business will be worth $30 more.  Understanding this concept puts into perspective what it actually costs you to spend money that isn't adding back to your bottom line.  The math is pretty easy.  Every dollar is worth a dollar plus 10 more dollars when you sell your business.  Incremental sales are even a better way to increase your business's value but I'll dive a little deeper into that in a separate post.

 

So what are the other items that determine the amount purchasers are willing to pay for your business?

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  • Personnel - You and your key employees are what made your business attractive in the first place.

  • Reputation - Most purchasers aren't willing to invest in overcoming bad business practices.

  • Growth Potential - Population growth is important as it increases a purchaser's potential customers.

  • Market Share - Is there potential to increase business through "out serving" the competition.

  • Property Value and Condition - While this is not a primary consideration, it is important.

  • Proximity to Other Owned Locations - Adding to a purchaser's existing market is a good thing.

  • Combining Roof Tops - Eliminating redundant overhead and employees can be valuable.

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As I meet with and coach you through the process of maximizing your business value, we will examine each of these important areas and determine how best to use them to their full potential.

 

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