How to value the worth of your business
You may be surprised - revenue multipliers aren't the way to go.
(FORTUNE Small Business) -- Dear FSB: My partner and I are trying to determine the value of our healthcare IT consulting business.
We have been in business for 10 years and have grown consistently. We now have 30 full time employees and revenues between $5 million - $6 million. Since we are a niche services consulting company, we believe that we will be worth more than the average IT consulting company for a specific market of possible buyers, but may have a limited pool of companies that would be interested. Can you please provide a multiplier or ballpark range that we should expect to get at this time?
- Andrew Splitz, Boston
Dear Andrew: Being niche specialist does make your business more valuable, according to Scott Bushkie, president of Cornerstone Business Services in Green Bay, Wisc.
"The more defendable the niche, the less risk involved, the higher the value," he says.
To get a general idea of what comparable businesses are listed for, you can look somewhere like Business Valuation Resources, suggests Andy Cagnetta, CEO of Transworld Business Brokers Inc. of Ft. Lauderdale, Fla. However, he cautions: "With a business like yours, seeking a strategic buyer, the usual multiples go out the door."
Regardless of your industry, multiples are a very dangerous way to value a business, says Cathy J. Durham, of Capital Valuation Group in Madison, Wisc.
"Every business value is a forward-looking concept - what are the future economic benefits?," she asks. "Too many people think the business sheets and GAAP accounting can reflect that value, but they were never meant to do that."
The way she and other professionals calculate "the present value of future benefits" is by developing a discount rate for each business. Typically, it's between 20 and 30 percent, she says.
To do this, Durham goes beyond the financials and sits down with the management to determine the businesses' risks and opportunities.
"I ask a whole bunch of questions," Durham says. "How many contracts do you have now? How many of them do you see remaining in the future? If you're highly depending on only one or two clients, what happens when one goes away? How do you build your revenue projections and expenses? How will you react to support revenue growth? When will you need more office space, more people, more equipment?"
These are things that aren't quantified in the financial sheets and multipliers.