When we look to value a company, we typically look at the industry comps for valuation multiples. Typically, a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization). By looking at companies in the same field, we can determine the potential value of your company.
The challenge is as small business owners we tend to mitigate the “profit” in the business to lessen the tax obligation. The exact opposite of building value by growing the bottom line.
Therefore, we need another approach called Seller’s Discretionary Income. Much of the “value” of a small business is in owner compensation or benefits, thus the need to recapture these in the valuation. This allows us to gain a better sense of the true value of the business.
Of course, this is an exercise we undergo when a sale is imminent. But, it is also helpful in your long term planning. The goal is to sell or transfer the business smartly to facilitate your overall financial/retirement planning. Therefore, it is important to look at your 2016 to see if you’re on track. If you want to retire in 5 years, what would the value of the Company need to be to allow you to do so? Where are you today compared to where the numbers need to be to reach that valuation? What should you be doing differently in your business to advance your goal?
If you don’t plan for a successful exit, the probability is high that you won’t capture the full value of what you’ve built.
There are many approaches to valuation and we can guide you through the process. Our job is to make your life easier.
At ZümiFi, we sweat the details so you don’t have to!