How Do You Determine the Value of a Business?
Timeline
At LGI we use our proprietary software to support us when we value a business, and
we normally like to use at least 10 methods. We ask our clients to complete a
Business Valuation Questionnaire after one on one meeting.
We usually can complete the valuation assignment within 2 weeks after all the documentation of information has been received at our office.
Market Value
Valuation is an art and a science where experience counts. We can be instrumental
in identifying your business’ hidden assets and arriving at an asking price that fairly
reflects the value of your business in today’s market. Your assets, inventory, income
statements, property (if any) and equipment will be carefully considered, as well as
the intangible assets that make your business appealing.
LGI’s proven methods of valuing and marketing will put your business in the best possible
position to sell. We use a combination of valuation methods, which include taking into
consideration not only your current income, but also your past financial history
and future projections while adhering to industry standards.
An Approach that Sets Us Apart
Determining value is more than seeing the profits of a given business, many factors play a part in business value, some you may not even know you had. Knowing your value gives you leverage and confidence. A common misconception is to use 2 times gross income or 3 to 5 times net income. This is not usually correct.
I like to use the analogy of selling a major franchised restaurant, say you have one of their units doing 3.5M in sales and cash flowing 400K in profits in one year, the prior
years were 4M in sales and 500K in profits, the equipment is worn out, high turnover in
staffing, the location is due for re-imaging (remodel) paid by franchisee, the area around
the unit is losing population and a new road will soon bypass this location.
Then you have another unit with the exact sales of 4M, same cash flow, but the prior year
sales were 3.5M and the cash flow was 400K, the exact same as the prior unit we used.
This store has new equipment, young, energized management with stable employees, the
store is only 4 year old so no re-imaging is needed and the area is booming around it with
new big box stores and new highway just opened up! This location has more value and this should be used as leverage. So if you used the comparison sales method only, these 2 stores would be the same value.
This is why you need to drill down deeper when you value businesses, ask more
questions, I have over 60 questions that I check off, how active is the owner in the
business, how many years has the staff been employed, is the equipment worn, is there a
new competitor coming into the market, are there unpaid employees not on the payroll?
What upgrades are needed to grow sales? These are just a few of the questions that I start
with before I even look at the financials of the business.
If you are seeking to value your business for any reason, partnership dissolution,
retirement, divorce, employee internal purchase or just need to know, contact LGI
Business Advisors, chances are we have worked on similar situation over the last 30
years and we can assist you.
Partial List of National Franchise Resales
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