Determining the Value of Your Design Business
You've decided to sell your business. How do you determine what it's worth? Ascertaining the value of a business requires the analysis of quantifiable numbers, such as income and debt, but it also must take into account more intangible assets, such as reuptation and the loyalty of clients.
Fair Market Value
Prior to an actual sale, how does one realistically determine what a buyer would pay? What are the conditions and extenuating circumstances one must consider in order to arrive at an accurate, equitable, net-sum result? Arriving at fair market value can be challenging, particularly for service businesses (such as interior design) that can't simply tally up the value of their property, inventory and fixtures. Lawrence Tuller, author of The Small Business Valuation Book, claims that for many service businesses, "It is the value of goodwill that makes up the major portion of the fair market value of the business." Goodwill is an intangible asset that can include the reputation of a company, how recognizable its name is, customer loyalty, location, etc. Tuller notes that while goodwill doesn't have a fixed monetary value, it does add economic benefits to a company and needs to be considered in the valuation process.
Capitalization of Earnings
Hard numbers matter, too, of course. Prospective buyers want to know what cash flow they can expect, how much they'll have to pay for operations and how much will be left over to go into their pockets. Tuller recommends the "capitalization of earnings" method as the best, most accurate way to value a professional or service business. This valuation method is based on the expectation that future earnings will duplicate prior years' earnings. It eliminates disagreements over depreciated equiment, work in process and tough-to-quantify variables such as maket position and goodwill.
But because this method hinges on determining a capitalization rate (which can range anywhere from 15 to 40 percent), you'll want to enlist the help of a professional. Check the Yellow Pages or the Internet for business brokers in your area. Most brokers won't work with businesses selling for less than $500,000 to $1 million, but you can find some who will consult on an hourly basis and provide some good advice.
It not only takes time to prepare a business for sale, it also takes time to locate and qualify a buyer, negotiate a deal and complete the sale. Typically, it can take six to 12 months or more to sell a firm once all the preparation and evalutation work is done.
- Business Valuation
- Business Appraiser's Role
- Business Valuation 101: The Five Myths of Valuing a Private Business