NovarsGroup Business Brokers

----- quick business valuation summary -----

pricing your company

Price is Derived at What the Buyer Will Pay

Understand that there is NO magic formula for setting price. Price is calculated with this one rule in mind:

Price is set at what the buyer will pay — it is not derived from any mathematical equation but rather as a psychological perception by the buyer.

If the buyer perceives that the value of business is great, they will pay a higher price. That will be dependant on the buyers needs, strategy, and resources. That is why you should target your selling strategy to those buyers who will perceive your offering at a greater value.

 

Company Valuation Using Cash-Asset Position

Use this simple but non-substantiated business valuation formula to value and price your business:

Pricing Formula:
	Take the value of your assets minus your account receivables (the value should be after you have recasted your financials) Formula: Sum(1) = asset value - current acct receivables
	Add your net asset value to your 1-Yr. cash flow (use the most recent year's cash flow position) Formula: Sum(2) = Sum(1) + one year's cash flow
	Now take the cash flow and multiply it by 3 Formula: Sum(3) = one year's cash flow x 3
	Add Sum(2) and Sum(3): Formula: Sum(4) = (net asset value + cash flow) + (cash flow x 3)
	Divide Sum(4) by 2
	Add in the value of the accounts receivables Formula: Sum(5) = (Sum(4) / 2) + (Accounts Receivables) This will give you an approximate value of the business. See calculation at side.

Example:
Asset Value	$84,000
Accounts Receivables	$15,000
Cash Flow	$45,000
Step 1: Asset Value - accounts receivables	$69,000
Step 2: Sum the asset value + cash flow	$114,000
Step 3: Multiply cash flow by 3	$135,000
Step 4: Sum Steps 1+2	$249,000
Step 5: Divide Step 3 by 2	$124,500
Step 6: Add back in the accts. receivables	$139,500
Approximate Value of the Company	$130,000-$150,000
Note: This is an approximate valuation based on asset value and cash flow position. A true value is derived by completing a professional valuation.

Setting Price by Weighted-Cash Flow

This is a common practice used in the industry to get an estimated company valuation. It is based on the weighted cash flow position of the company over a 2-yr, 3-yr or 5-yr average.

You simply "weight" the current and prior's year cash flow position to derive the company's overall cash flow that is multiplied by an industry multiple to derive overall value.

Pricing Formula:
	Formula 2-Yr Avg: Cash Flow = (2011 cash flow*2 + 2010 cash flow*1)/3 Formula 3-Yr Avg: Cash Flow = (2011 cash flow*3 + 2010 cash flow*2 + 2009 cash flow*1)/6 Formula 5-Yr Avg: Cash Flow = (2011 cash flow*5 + 2010 cash flow*4 + 2009 cash flow*3 + 2008 cash flow *2 + 2004 cash flow *1)/15
	Find the industry multiple Formula: the industry multiple is determined by similar companies that have sold or that are currently on the market
	Take the cash flow average and multiply it by an industry multiple Formula: Sum(2) = weighted cash flow X industry multiple See calculation at side.

Example:
Cash Value	2011: $175K 2010: $188K 2009: $167K 2008: $171K 2007: $146K
5-Yr Weighted Average	$174.4K
3-Yr Weighted Average	$178K
2-Yr Weighted Average	$179.3K
Industry Multiple	2.5
Step 1: 5-yr weighted avg X multiple	$436,000
Step 2: 2-Yr weighted avg X multiple	$448,250
Approximate Value of the Company	$435,000-$450,000
Note: This is an approximate valuation based on asset value and cash flow position. A true value is derived by completing a professional valuation.

 

Setting Price by Your Marketing Strength

If your business has intrinsic value such as goodwill, established contractual relationships, prime location, or patented technology, you may set a value that equates the cost it would take for the buyer to replicate that value.

For example: if you have patented technology that would cost the buyer $YYY in development, the value of that technology would be priced at $YYY if the technology can be used in the going operations of the business.

If your business has contractual relationships that would take a buyer $ZZZ dollars to develop, the value of those relationships would be worth $ZZZ if those contracts can be transferred to the new buyer.

Setting these values can be tricky. We highly recommend that you use a professional valuation based on:

1. Income Based Approach
   measures the present worth of anticipated future net cash flows
   
   
2. Market Comparison Approach
   compares recent transactions of similar businesses that have been sold
   
   more information about company valuations

 

Setting Price by Asset Holdings

Asset valuation is less complex than market valuation. You simply price the company based on the replacement or liquidation value of your company assets and equipment.

If you have specialized equipment that is not easily compared in value with other readily available equipment, you might consider a professional valuation based on:

1. Asset Based Approach
   considers the replacement cost as an indicator of value. This will substantiate the asking price for your asset holdings — we have more information about company valuations