By Cristhine O

Understanding Business Valuations

Bill has been his own boss since he finished high school. What began as a summer job mowing lawns for neighbors evolved into a full-fledged landscaping business.

Fast forward four decades, and Bill’s Lawn Service expanded to the point where he needed a team. Today, an office manager handles the administrative tasks, and a fleet of trucks bearing Bill’s logo can be seen throughout the city.

Over the years, Bill has cherished the experience of nurturing his business. However, as he ages, thoughts of retirement loom. He’s poured his heart and soul into the company, often at the expense of personal time with loved ones. Now, he feels it’s time to reap the rewards. He puts his business on the market for $1 million.

What is a Business Valuation

But after weeks without a single inquiry, an investor finally shows interest, only to offer $300,000. The investor justifies the lowball offer by pointing to the 2X multiple on Bill’s annual profit of $150,000. Feeling undervalued, Bill declines the offer. This scenario is all too common, with many entrepreneurs unsure of how to accurately value their businesses.

Do you see any similarities between your journey and Bill’s?

Grasping the intricacies of business valuations can prevent such misunderstandings, safeguarding the interests of both buyers and sellers.

What is a Business Valuation? 

At its core, valuation is about determining worth. Business value stems from assets, operations, financial performance, profitability, and systematic processes. Business prices are often deduced using straightforward mathematical formulas.

While sellers tend to focus on future prospects, buyers delve deeper. They scrutinize past records, current performance, and future projections. Valuation strikes a balance, blending financial and industry data.

How is a Business Valuation Determined?

How is a Business Valuation Determined

The formula is: Business valuation = (Profit/EBITDA/SDE) X industry multiple.

Revenue can be determined in two ways: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and SDE (Sellers Discretionary Earnings). Akbosh Investment Group uses recent financial data, typically spanning one to three years, to ascertain these figures. The focus is on recent data, but trends over three years are also considered.

Then, the profit metric (either EBITDA or SDE) is multiplied by an industry-specific multiple. There are publicly available charts that provide multiples for various industries. For instance, if a plumbing company’s EBITDA is $5 million and the industry multiple is 3, the business valuation would be $15 million.

The Importance of Valuation

Valuation reflects a business’s current standing. Buyers aren’t just interested in past achievements or potential; they need to assess the present situation. External factors, like economic downturns or global events, can influence a business’s health. How a business responds to crises can reveal much about its resilience.

Understanding Valuation Through Real Estate

Understanding Valuation Through Real Estate

Consider real estate. Property values are often determined by comparing prices of nearby homes. If houses in a particular area are selling for $300,000, that sets a benchmark. However, if a homeowner has invested heavily in renovations, it doesn’t necessarily double the home’s value. Similarly, in business, having numerous positive reviews or a large social media following doesn’t automatically inflate its value.

The Fairness Spectrum in Valuation

Fair valuations are transparent. Both parties can justify their figures with data. Akbosh Investment Group encourages sellers to provide a price range rather than a fixed figure, facilitating negotiations that are fair to both sides.

Pitfalls of Inaccurate Valuation

Misjudged valuations can be detrimental. If a business is undervalued, the seller loses out. If overvalued, the buyer might not see a return on their investment. Akbosh Investment Group strives for win-win scenarios that cater to both parties’ interests.

In conclusion, a business valuation, when done right, is a straightforward process. It’s a blend of math and industry knowledge, ensuring fairness for all involved.

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Akbosh Investment Group is an investment management company that acquires, scales, and sells companies that benefit all stakeholders at large.

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