What is the value of your company?

[Frank DiGi]

If you was to sell your business how would you determine the true value?
By your equipment, trucks ect ? Your customer base? The net income your company brings in per year? Operating cost vs profit?

What are the factors that will give you the right number?

 

[1ST CHOICE CLEANING]

Easy. I owe $171k on my house and $10k on my wifes car so I would need $181k

 

[brentnorman]

I'm sitting somewhere in the negative. I think I would have to pay someone to buy my business.
I went to buy a carpet cleaning company before starting my own and all the bank would say they were worth is just their assets for the company. Even though the company was doing a lot of work and making a lot of money that is all "blue sky" without signed contracts. Not worth anything. Couldn't buy them out, couldn't come close to what he wanted.


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[Gavin]

I like to look at it as just another investment. If it was running with all the employees and a general manager so the person investing in it / buying it had to do zero work. How much would the company make? if the answer is that you would loose money or break even if you paid someone else to do all the managing and work, then it's not worth a penny more then what you could scrap the equipment for.

on the other hand if you are making money, how much would you have to invest in the stock market or other type of investment to make a similar profit, or the same return on your investment? That's how much the company is worth.

so lets say your company grosses 100k but after taxes, employees, chems, gas, and equipment repairs, accounting, insurance, the list goes on, at the end of the year you make 10k, this is without you touching the business at all, you have to pay a manager to run it for you, and right now i am guessing even the guys who are not on the truck anymore are still managing the business. so you have to account for how much you are going to pay a manager. your company would be worth 100k

If you had 100k to invest realistically you would be looking at an 8 - 10 percent return investing in a diversified portfolio in the stock market. that 100k would make you 10k, investing in a small business carries a little more risk, that risk can make the company worth a little less, but the payout can be greater, because with a little tweaking you might be able to get a better profit margin out of a small cc company like that and be looking at a 20% margin instead of a 10, and making 20k a year off a 100k investment is not half bad.

But not everyone is looking at buying a CC business, and most companies are not "hands off"so the real question is who is willing to invest in it, and how much are they willing to pay for the chance to be their own boss, and how much are they willing to pay for something that is already up and running vs starting out as a new company?

 

[Zarz]

I've always been under the impression that any business is worth 3x it's nett income as shown via a tax return. So if you show $50000 as a nett income then you would be wanting to get $150000 as a business sale regardless of equipement. I'm sure I'm wrong tho


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[Steve Toburen]

If you was to sell your business how would you determine the true value?
By your equipment, trucks ect ? Your customer base? The net income your company brings in per year? Operating cost vs profit?

What are the factors that will give you the right number?

This is a good question for everyone, Frank, even if they are not interested in selling their business right now. Why? Because properly managed your company should become a "constantly appreciating asset" that will help fund your Golden Years when you sell or transfer it to your employees or your kids. And of course the only way to know if the value of your company is increasing is to check it periodically. (I suggest running your numbers every quarter.) But Gavin nailed the challenge here:

... not everyone is looking at buying a CC business, and most companies are not "hands off"so the real question is who is willing to invest in it, and how much are they willing to pay for the chance to be their own boss, and how much are they willing to pay for something that is already up and running vs starting out as a new company?

Gavin makes some good points in his post above and especially what I have quoted here. At the end of the day anything is worth exactly what someone is willing to pay for it! (And you have a very small universe when it comes to people who want to buy a "management intensive" business like a carpet cleaning company.)

But remember that the Buyer's Desired ROI is one of the huge deciding factors in what your actual selling price and/or worth of your business will be. Because I have a huge amount of back-logged work stacked up this morning let me do a quick cut-and-paste on this topic from my Special Report: How to Value Your Carpet Cleaning Business.

"... your business is competing with 1,000's of other investment
opportunities. The yardstick by which your buyer will judge all these different places for him
to invest his money is called “Return on Investment.”(ROI) This is the percentage of money your
prospect can expect to earn for dedicating their cash to this investment, your business, for a
given period of time.

For example, a money market fund or savings account will historically yield a ROI of between 2
and 8 percent, depending on where interest rates are. That doesn't sound like much, but look at
it from an investor's viewpoint. Any risk? Almost none. Any owner involvement required? None
whatsoever! Liquidity? Can't beat it! Just write a check. What's this mean to you? Your
projected return on investment must be better, a whole lot better, than the return on a money
market fund to entice a buyer to invest in your company. I know you love your business but let's
think about this non-emotionally …

Few things in life are perceived by a potential investor as riskier than purchasing a small
service business. When many stock market mutual funds can consistently historically average a
6%, 8% or even 10% ROI over a ten year period, with no ownership involvement, good liquidity and
a fairly low risk ratio.... and with the possibility for substantial capital gains, it‟s obvious
you need to offer a better rate of return to the buyer of your small business.

What‟s normal? Your business appraiser will give you a much more accurate and specific picture,
but most small service businesses are priced to give a ROI, or a capitalization rate, of between
20% and 50%. Much lower than that 20% amount and other (safer) investments are too attractive
too pass up. Much higher than 50% and there isn't going to be any money left for the seller!

Here is the key point for you to remember: The higher the ROI percentage the lower the selling
price will be for your business. In other words, if your adjusted owner‟s cash flow is $50,000.00
and you and your buyer agree on a Desired Return on Investment(DROI) of 25%, the amount your buyer will
pay for this income stream is $200,000.00. Now if your buyer demands a DROI of 50% that means they
wil only pay $100,000.00 for that same income stream your cleaning operation produces. So obviously the rate the percentage
your business is capitalized at will have a huge effect on its final selling price."

So if anyone wants the entire Special Report on How to Value Your Carpet Cleaning Business (which includes a Business Valuation worksheet you should fill out every three months to check your company's growth in value) just write me at [email protected] and put the words "TMF Business Worth" on the subject line. I'll email you the entire Special Report at no charge. Or you can go HERE and download the Special Report- your choice but I always like to hear from you folks.

Steve Toburen
www.SFS.https://shop.truckmountforums.com.com

PS Two huge cautions here:

1) Do NOT use my numbers in the Valuation Worksheet to actually price and put your business up for sale. You should have a local Certified Business Appraiser help you arrive at a selling price. And even before you do this and MUCH more importantly...

2) Do NOT sell your company without asking yourself some very serious questions. There really is such a thing as "Seller's Remorse!"

 

[spotman123]

Excellent question frank! Not sure .

 

[Steve Toburen]

Excellent question frank! Not sure .

It doesn't really matter the exact value. What is more important that the "value trend" of your company is steadily increasing and that is why working your numbers on a Initial Business Valuation Worksheet every three months is so important.

I tell every SFS class, "If you have to 'burn the years' anyway just making a living why not at the same time 'double dip' and create a steadily appreciating asset out of your company?"

Steve Toburen
www.SFS.https://shop.truckmountforums.com.com

PS A very smart man told me many years ago, "Steve, everything you do to make your company more valuable and easier to sell also makes it a more-fun-to-run business right now so you may never sell it." And that works for me since a Critical Mass business that will run without you means you will have Personal Freedom and great cash flow coming in to finance that freedom!