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What is my company worth?

- John Mickelson, managing partner Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. 

Business owners often consider their business to be an extension of themselves and many have a high opinion of what their business is worth. Telling the business owner the “wrong number” can be like calling their baby ugly. If they seek to sell their business though, they need to have a realistic idea of what it is worth. 

So how are businesses valued by buyers?

It is purely supply and demand and, at any given time, a business is worth exactly what someone is willing to pay for it. Period. Tire-kickers do not buy businesses, buyers do.

If you need help figuring this out, a reputable business broker or investment banker can provide you with a range of what is realistic.

The primary valuation techniques involve value of assets, including intangibles, and cash-flow. In addition to those, several factors can influence how buyers like Midwest Growth Partners will view the value of your business.

Here are a few of the less common:

  1. Would your business provide a competitor with an immediate way to enter a new sales or product market? If so, and if that company is interested in making acquisitions, that buyer should be willing to pay a premium for your business.
  2. Does your business have steady, consistent cash flow like an alarm company, which has a 95 percent annual renewal rate or is it lumpy cash flow that is more project-based like a general contractor? Buyers are willing to pay more for businesses with predictable cash flow.
  3. Are there leverageable assets in place? Commercial banks are increasingly picky on what assets they will lend money against. If your business does not have assets that a buyer can secure debt with, the buyer universe will shrink because it will require all-cash buyers and therefore the value will go down.
  4. Is there a competent management team in place that can run the business if you are gone? A buyer may have their own ideas for strategic or personnel improvements – but they will also be willing to pay more if there is a talented team already in place.
  5. Does the business require significant working capital during parts of the year to operate? A buyer will pay more for a business if cash is not tied up in inventory or accounts payable.
  6. Are capital expenditures and systems up to date? A buyer will be willing to pay more if they know they are not going to have to spend cash immediately to catch-up on deferred capital expenditures.

These are a few of many, but are a good way to start the process of determining a value. 


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