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.
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!"