I have met with very few business owners over the years who have had a strong understanding of how businesses are valued. I’ve heard everything from “My mailman told me Google just bought a similar company for 100 times revenue” to “I’m not sure anyone would want to buy my company.”
Valuing a business is certainly more of an art than a science. In real estate, you can compare price per square foot to nearby sold comps to get a quick rule of thumb. Valuations of businesses aren’t as cookie cutter for a couple of key reasons. 1. No two businesses are identical. 2. There is no MLS type system available for detailed comps.
I’ll give you an example of how two seemingly similar companies can lead to three different opinions of value:
Company A is a Landscape Company in business for over 35 years. They Grossed $2.8m with a SDE of $350k last year. The owner works 40 hours per week mainly focusing on management. They do 90% new construction landscaping and 10% maintenance. Sales increased 15% this year.
Company B is a Landscape Company in business for 5 years. They Grossed $1.5m with a SDE of $350k last year. The owner works 40 hours per week mainly focusing on management. They do 90% repeat maintenance contracts and 10% new construction. Sales were stable this year.
Here are 3 varying opinions of these companies:
a. Both companies are worth about the same since they have identical profits.
b. Company A is worth more because they have been in business for 30 years longer, Gross much more than Company B and sales increased 15% this year.
c. Company B is worth more because they have 90% repeat maintenance accounts.
Which opinion do you agree with?
They all seem logical for different reasons. But what if I told you I could sell Company B for substantially more than Company A?
Do you agree, disagree?
I’m interested in hearing your opinions.
Senior Business Broker with First Choice Business Brokers
Top Producing Agent Nationwide