Know Your Business Worth in Pittsburgh
Be honest, you’ve thought about it while lying in bed after a hard day. You have thought about getting out. You don’t need this hassle. You hear people talk about business valuation, multiple of earnings, multiple on sales, or EBIT, etc. You may have even asked your accountant what he/she thinks your business is worth.
If you’re like most people, you have an idea on how much you need to retire. For many people, this is what they want, even believe, their business to be worth.
Inexperienced intermediaries push sellers to pay for a business valuation. We believe you should never pay for a valuation. We do this for you for no charge. With daily interaction in the marketplace, access to a private database of business sales, and access to comparative data for recent transactions in a wide range of industries, we stay informed about current prices being paid for companies. Based on our experience, we can provide you with a value range that you are likely to achieve in today’s market so you can make an informed decision to proceed or hold off to a later date. We welcome discussions with you and any of your advisors to question our estimates.
There are numerous scams in the industry selling valuations for $2,500 to $50,000. We have met dozens of business owners who have paid a lot of money to simply receive a useless, generic valuation. It is not used, or valued, by buyers or by lenders working for buyers.
The value of your business is driven by many factors, some financial and some other factors. Buyers are primarily attracted to cash flow. Risk is the enemy. The less risk perceived in a business, the higher the value that will be received. For example, the following factors can affect a business’ value:
- The predictability and certainty of cash flow. Some businesses have recurring revenue (payroll business, self storage, monthly maintenance agreements, etc.) and others have no recurring revenue (most contractors, retail, etc.). Businesses that don’t fluctuate much are also more desirable.
- Customer concentration affects business value and terms. Companies with low concentration (no customer >10% of sales) are going to yield a higher price and more attractive terms than a company with customer(s) that individually are at least 20% of sales.
- The state of financial information can impact valuation. It is important to have solid, clean financial statements that match filed tax returns.
- A business with increasing profitability is going to yield a higher value than a business with flat or shrinking profits.
- The importance of the owner to the business is one of the most critical, and least talked about, attributes to the value of the business and the attractiveness to buyers. Buyers are very attracted to businesses without absentee owners. The other end of the spectrum is a business where the owner is working 60+ hours per week, has unique experience/knowledge, has personal relationships with customers, and may even have some license or certification (PE, CPA, Dr.) that is required. Every buyer imagines how the business performs without the owner and the risk associated with that replacement is very important.
- The company’s competitive position in the market and the industry the company is in will have an impact on value. A company in a highly price sensitive industry will yield less value than a company with an oligopoly or monopoly.
- The number and type of barriers to entry will affect valuation. A home cleaning business will yield less value (everything else being equal) than a company with a “Defensible Position”. “Defensible Position” in this context can mean patents, trade secrets, brand names, special licenses, and other characteristics that provide a barrier new competition.
- High margin businesses will generally higher valuations than low margin businesses. A chemical company with 70%+ gross margins will be more attractive than an auto parts company.
- Various other intangible factors will affect value. A “fun” business that a buyer is excited about where customers are happy to receive the service can value higher than negative businesses, like a transmission shop, where most customers are not very happy.
Since so many factors can impact valuation, we require a meeting with the owner to gain an understanding of the business before estimating a value for the business. We need to get an feel for the subjective side of the business, not just the financials.
When we perform a valuation, we estimate all fees and taxes to calculate a net cash after-tax estimate of what you would receive. This is far more important than just a basic business value because deal structures (asset sale vs. stock sale on “C” corporations) can have a significant impact on taxes. We want you to know what to expect and not have a surprise late in the process of a sale.