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How are Privately Owned Businesses Valued?

What is My Business Worth?

While it can be relatively simple to value a publicly traded company, there is so much confusion associated with how a non-publicly traded company is valued.  In this article, I want to help clear up any confusion and help outline the well-tested and well-vetted process of how all businesses are assessed.valuation-paper-on-clipboard-with-glasses

Just to be clear, this is 100% focused on valuing your company when you want to SELL. The reason I make this clarification is that there are many reasons why businesses are valued and based on what the reason is the valuation can be drastically different. This fact is a crazy reality, but it is a fact of business valuations. 

99% of all privately owned businesses are valued for the purpose of selling and we only have a hand full of methods that are customarily utilized. There are three primary acceptable business valuation methods. One may be more suitable than another, depending on the type of business being valued, including its industry, size, and circumstances of sell.

The Market, Income & Asset Approach

The Market Approach

This approach is often my “go-to” since it is the least subjective and based more on facts. The market approach is utilized when you have a number of similar businesses in the same industry that have recently sold and can serve as comparable transactions.  A comparable transaction is when you can locate businesses that have recently sold in your industry with your level of revenue, profit, and assets, an "apples to apples” comparison so to speak.

One example would be a Service Magic Franchise. There are a variety of Service Magic Franchise locations that offer comparable sales.  This type of comparable information provides the confidence to place a high value on the market approach.

Similarly, when selling an accounting practice it is very common to find a high number of comparable CPA’s practices that have sold primarily based on “revenue to value." These again would allow us to be confident that the Market Approach truly reflects the actual value of this business (based on price based on revenue).  

In the end, the importance that you place on an approach comes down to confidence.  The more confident that you are that the value is based on facts makes it more viable for a ready willing and able buyer to have confidence and move forward to purchase your business.

Other Considerations:

It is crucial when comparing your company to others that have sold that you objectively compare the two.  This is why having a professional database and experience is necessary. The following areas are crucial to accurately your company to another. The items you must compare should include revenue, SDE (cash flow, profit) asset value, geographic location, etc.  Two companies may both be in the service industry; however, if one is a large company in New York and the other a small service company in Texas, comparing the two would not be sufficiently relevant. It is also crucial to analyze the correct financial data. For example, one company may be listing the financials as TTM (trailing twelve months) or even as the projection of the business that was sold.

The Income Approach

The income approach is based on the principle of the future expectation of the businesses revenue and/or profit. In simple terms, this approach calculates the value of the business based on the future financial benefit combined with the level of risk that one could expect from that business. Meaning, how likely is the revenue to continue in the future.fan-of-money-in-hands

The income approach calculates the value by projecting out the future economic benefit (cash flow) and discounting it back to the present time using a discount rate. The discount rate is specific to the risk of the industry and the business being valued.

Other Considerations:

Discounted Cash Flow (DCF): When you perform the calculation that we outlined above the new “SDE” or “profit” is called “DCF” (Discounted Cash Flow). While the calculations are complex, the purpose of DCF in this approach is merely to estimate the money a buyer would receive from purchasing the business, adjusted for the time value of money.

The income approach is most likely always going to be considered and heavily weighted when working with a quality business broker and business appraiser. 

The Asset Approach

In simple terms, the asset approach is rarely used if you are valuing a business with current revenue and operations.  The asset approach is only considered if the company is more valuable if liquidated for its assets than it would be if it continued to operate for cash flow or profit. Examples would be jewelry stores, larger equipment rental companies or manufacturing businesses with limited to no cash flow

Fixed assets are typically taken at the fair market value or replacement value. This value is determined by establishing the cost to replace the asset at its current location and condition today.  The replacement value also takes into consideration what assets are currently being used and which are obsolete. 

Many times banking institutions are looking at book value of the assets.  The reason why we do not take this number when valuing a business is that the book value (the value that you have on your balance sheet) may not reflect the actual value of the assets of the company.

Replacement value method is the more refined way of calculating the value of the company; however, it comes with the drawback of incorrect estimation.

While inventory and Accounts Receivables both are considered an asset of the business, some adjustments may need to be made. These adjustments are made for non-collectible A/R or obsolete inventory.  

If liabilities are included, they are also typically subtracted from the replacement value of the assets.  These liabilities should be updated to the date of the valuation.

Final Notes

When it comes time to sell your business, it’s crucial that you set your personal feelings aside to perform an accurate business valuation and establish a realistic and competitive selling price. You’ll need to objectively analyze your business, study the current market and consider employing the expertise of a professional business broker/appraiser.

We also have articles on our blog that break down specific business types that take these principles and apply them to each industry, no matter if you desire to sell a machine shop, oil and gas service company or distribution company. Contact Sigma today if you’re thinking of selling your business!


You Might be Dealing with a Bad Business Broker if…

Business brokerages are no different than any other businesses – there are good firms and there are bad firms. So how do you determine a bad business broker from a good one? First, don’t confuse a broker’s personality with his/her business practices. There can be very poor business brokers with likable personalities, so it’s important not to choose a broker just because you like the individual – you really need to understand if you’re dealing with a good firm.

When it comes to signs you should be looking for that point to a bad business broker, here are some important things to consider.

You might be dealing with a bad business broker if…

You’re having difficulty getting references quickly

When you ask for references, you should expect to get a minimum of three names, and you should expect to get that information immediately. A good business broker has numerous references at his/her fingertips, and doesn’t need time to look for people who will give a good recommendation.

In addition, don’t just limit yourself to references the broker provides you. See if the broker has any Google reviews, or check the specific agent’s LinkedIn account to see what people have said about him/her. Even a bad business broker can scrounge up a decent referral or two, so don’t just count on what a reference says. Take the time to do a little digging on your own also.

The broker charges upfront fees

First, a disclaimer about upfront fees: Just because a business broker charges upfront fees does not mean it’s a bad firm. With that said, if a broker is asking for money upfront, you certainly need to do your homework and understand why.

Are upfront fees typically required by brokers in your area? In some parts of the country just about every broker requires fees upfront, while in other areas most reputable brokers don’t charge anything upfront. Do enough research to know what’s standard in your market.

Does the broker apply all of your fees to the final commission at closing? You want to make sure that if you are paying a fee upfront that those dollars will be applied to the broker’s final commission. If you pay $25,000 upfront and the broker’s commission ends up being $100,000 after the sale, you should only owe him/her $75,000 at closing.

What is the broker’s “pitch?” Be leery of why a broker is asking for a fee upfront. He/she should be able to give you a clear explanation as to why a fee is justified, what it covers and how the amount is determined.

You don’t understand the marketing plan

Effectively marketing a business for sale is not easy. So it stands to reason that any good business broker will have a defined program he/she employs on every single business listing. This plan should not be a mystery to you – the broker should be able to explain his/her marketing program so that you can understand what will be done.

A bad business broker won’t have a defined and thoughtful marketing plan, or he/she won’t be able to explain the plan to you. There is a major difference between “hoping” a business sells and “selling” a business. A bad business broker hopes listings will sell and has no real plan to overcome difficulties in the process, while a good business broker knows the likelihood of selling every listing is extremely high because of the system he/she has in place to market the business.

The broker lets the buyer dictate the process

How does a buyer actually buy a business? If you’ve been involved in a business acquisition before, then you know there are literally hundreds of steps and details that need to be handled in order to close a transaction. Bad business brokers leave this process up to the buyer and allow the buyer to take charge.

Your broker needs to be the authority in this process, and should be able to walk you through how he/she manages buyers and the buying process. A good business broker provides a buyer with a detailed, step-by-step plan that guides the buyer through the entire gauntlet of the acquisition, and then works with the buyer to make sure all his/her needs are being met and questions are being addressed along the way.

Having a clear buyer plan is also imperative in order for the broker to provide adequate protection for you. By letting a buyer dictate the process, you are running a huge risk. Without proper oversight, buyers could unintentionally damage your business simply because the broker is not there to guide them.

The broker doesn’t provide you with a detailed business valuation

Anyone can quote you a value for your business. Some brokers might actually be willing to give you an estimate over the phone after asking a few simple questions, while others might look over your financial statements for a day and then give you a verbal estimate, and some may even just email you a number. These are all signs of bad business brokers.

You deserve much more than a “back-of-the-napkin” estimate when it comes to determining your business’ value – you certainly didn’t put years of blood, sweat and tears into your business only to have it reduced to a number a bad business broker spends an hour “calculating.”


You should expect a business broker to provide you with a comprehensive, detailed, written business valuation report. A good business broker should not only explain the “what,” but also the “why,” “when,” “who” and “how.” While you may not agree with the valuation you get from a broker, you should at least be able to respect the process the broker went through and the effort he/she put into the analysis.

Also, be on the lookout for a broker who gives you a high value without supporting it. Bad business brokers are notorious for presenting you with unrealistic values to get you excited so you’ll list your business with them. Their hope is that when offers start to come in at a lower, more realistic price, that you’ll break down and accept it. This is a tactic called “seller’s fatigue” and bad business brokers will use it.

The broker doesn’t seem that interested in you or your business

At its core, a business acquisition is pretty basic – one party buying something from another party. That’s exactly how a bad business broker looks at your deal. It’s just a transaction and a commission.

How can a broker effectively represent your business if he/she hasn’t taken the time to really dive in, ask the tough questions and ultimately understand what makes your business unique and valuable? Furthermore, how can a broker expect to represent you if he/she hasn’t made the effort to understand your motivations for selling and what’s truly important for you to accomplish after the sale?

Your broker should be passionate about your business and your goals, otherwise he/she should never accept your listing.

You haven’t heard anything negative about your business

There is no perfect business. Period. Every business has problems and challenges that will make it difficult to sell. Some of these issues are quite serious, while others are minor – but in either case your broker should be discussing these topics with you and offering solutions on how to overcome them.

A bad business broker either ignores a business’ problems or chooses to avoid discussing those problems with you for fear of losing the listing. If you haven’t heard any concerns coming from a broker who is evaluating your business, that should be a major red flag. A good broker will discuss challenging aspects of your business with you, making sure you understand his/her concern.

At the end of the day, choosing a business broker is a life-changing decision because selling your business is a life-changing event. While you want to avoid “analysis paralysis,” it’s in your best interests to take the extra time to ensure that the business broker you are choosing to handle the most important transaction of your life is not only someone you can trust and feel comfortable with, but is also someone who avoids the bad business broker red flags outlined above.


How to Sell Your Awning Manufacturing and Installation Company

Awning manufacturing and installation companies are taking advantage of recent residential and commercial growth

Traditionally, the commercial real estate sector has driven the awning manufacturing and installation industry. While commercial projects are still the primary revenue sources for these companies, an increase in residential work has proven substantial. According to a 2017 report by Grand View Research, the awning industry was approximately $2.4 billion in 2015. Given the growth in both the commercial and residential markets, that figure is expected to eclipse $3 billion by 2020, with 50% of that coming from the residential side.

As new commercial real estate development continues to progress, that piece of the awning market has steadily increased. Obviously a portion of this growth due to new construction, but for every new awning system that is installed on a building, there is a maintenance job coming to repair or replace that awning a few years down the road. What is really driving industry growth, however, is the bump in residential work. Homeowners have experienced a growing interest in quality outdoor living spaces – not just having a patio set on the porch, but a true outdoor living area. A critical piece to these new additions is some sort of shade system, and residential awning installation has grown as a result.

Given the positive market trend and steady recent growth in the awning industry, coupled with the traditional cyclic nature of construction, now is a great time to sell an awning manufacturing and installation company while the market is hot. The first step in this process is to find out how much your business is worth. We have provided some basic formulas you can use to estimate the value of an awning business and get a rough idea of where you stand. Keep in mind, however, there is much more to putting an accurate value on your business than these simple guidelines. A professional business broker can analyze your entire business operation and give you a true market valuation.

  • 5x-4.5x SDE (Seller’s Discretionary Earnings) + Inventory
  • 75% Total Revenue + Inventory

With a rough value estimate in mind, you might be wondering what you can do to increase the value of your awning business. Obviously, growing revenue and profitability will add value, but there are also other important attributes specific to your industry that not only improve your value, but also you marketability. Our firm has valued and sold numerous businesses like this – so we put together these five tips that can increase the value and attractiveness of your company.

Revenue Mixstack-of-cash-and-coins-on-top

Awning manufacturing and installation companies that receive the vast majority of their revenues from new construction projects are not going to be valued as favorably as those that have a healthy repair and replacement revenue segment. While new construction jobs are fantastic and tend to be larger projects, the cyclical nature of construction – especially commercial construction – can create a sense of guarded optimism with buyers. However, if your business has a strong foundation of repair and replacement work, the new construction risk can be mitigated somewhat.

Customer Concentration

Customer concentration is especially concerning in awning manufacturing and installation companies because it oftentimes comes with the heavy influence of new construction. Some companies fall in the trap of riding the new construction wave, and inherently will start to focus on one or two primary costumers that are sending them consistent work. As great as this impact might be for the owners in the short-term, when it comes to valuating and selling the company, it can be shockingly negative. Buyers want to see businesses spread their customer risk out, so that the loss of one or two accounts won’t devastate your company.

Organized Departments

Buyers also evaluate the operational risk of a business, in additional to financial factors. A company that has distinct departments with dedicated employees performing specific responsibilities is going to be valued more favorably than a business with employees multi-tasking with no clear duties. Specifically in awning companies, buyers want to see dedicated estimators/salespeople who quote and sell the jobs. Then the jobs are handed off to the production department that has specific employees doing fabrication or sewing. Finally, there are the install crews who handle assembly and installation. Companies that have a primary group of employees that move between multiple job responsibilities day-to-day are not going to be as attractive to buyers as those companies with more operational structure.

Large Projects

Be leery of selling your business in a year that may have been disproportionately propped up by a large project. In businesses like awning manufacturing and installation, this is a legitimate concern. If your business typically has a large project or two in a year and you can show a consistent history of securing these types of jobs, then it’s less of a concern. However, if you just happened to land a big project and decided to sell your business now based on the increased revenue you show, you can be sure that buyers will discount your business based on that anomaly. While it’s positive to demonstrate to buyers that your company can obtain and perform those larger projects, don’t expect them to pay a premium based off one abnormal year.

Vertical and Horizontal Integration

Another value-builder in the minds of buyers is integration. If you have the opportunity to add a service or product to your company that you are currently outsourcing, it can add not only a real cost-savings and improve the bottom line, but also impact the overall impression buyers have of the uniqueness and stability of your business. A vertical integration such as powder coating and painting is a good example. Additionally, think about other complementary products or services your customers need that are closely related to awnings. Electrical sign manufacturing comes to mind as a potential horizontal integration for an awning business. Anything along these lines you can integrate into your company will ultimately add value and distinctiveness with buyers.

Hopefully you can utilize these five tips to analyze your own operation and find ways to increase its value and marketability. Today’s market conditions for these types of businesses, along with more and more financing available for acquisitions, make this a tremendous time to consider selling your business. Whether that’s in the cards for you today, or you still need some time to get your company ready to sell, a professional business valuation is a great resource to have. That’s why we always offer business owners a no cost, no obligation business valuation before doing anything else. Feel free to contact us today and we can get that process started for you.

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