How to Benchmark the Value of a Business
The question that arises most often for many small business owners and others interested in purchasing a business is “what is a reasonable price for this business?” To some degree, every business is unique and therefore, there is no one-size-fits-all formula to determine the value.
Years ago, I was visiting with a dentist who was thinking about retiring and transferring the practice to an associate. His statement was, “why do I need to find the value of my practice when I read in the trade journals that dental practices sell for 65% of sales generated”. I simply replied by saying, “would you buy a practice that was generating profits which does not support the purchase price?” Likewise, would you sell your practice if it is generating above industry benchmark profits for the average selling price?
When benchmarking the value of a business, appraisers compare earnings measurements to other similar business in the marketplace, to create an indication of value. There are several types of financial measurements (i.e., sales, gross profits, EBITDA, net income, net cash flow, etc.). We don’t typically look at one financial measurement in isolation; rather, we consider several financial measurements in providing an indication of value. Those indications of value are then reconciled to form a final opinion of value. An opinion of value utilizes the appraiser’s professional judgement, experience and analysis to reach a conclusion.
How can American Business Appraisers Help?
Call us to discuss any specific valuation needs. Every individual situation is different and not everyone requires our appraisal services. Sometimes just talking with one of our appraisers is all that may be necessary. With our initial consultation, there is no cost or obligation to you. We promise you two things; first, to invest a reasonable amount of time to gain an understanding of your specific requirements, and second, our communication will be kept confidential.