3 Critical Factors for Middle Market Business Valuation

Selling a business is a significant and emotional event in the life of an entrepreneur, and the reason is two-fold. Firstly, the amount of effort and hard work that’s poured into every step of building a business – from idea, to starting point, to traction and then guidance to independence as a successful functioning enterprise – can take it out of us mere mortal business owners, on every level. So, it can be equally, if not more difficult to let go.

Secondly, our businesses leave indelible marks on our enterprising hearts because that’s just the nature of who we are – we love every milestone in an entrepreneurial life, and we love business.

But there comes that time when we all have to make the decision. Whether you’re needing to change things up in your life, or whether it’s time to transition your brainchild to those you know will help it grow and thrive even more, the time to exit will come.

And whether you’re ready to sell and are looking for a specific number, or you’re not quite ready yet but you’re kickstarting a strategy and plan for growth, there are three important factors that will definitely need to be taken into account.

Let’s look at those factors in a little more detail.

How Does Business Valuation Work?

Selling a business is more art than an exact science. Just as unique as your business is, there will be certain distinctive and exclusive factors that will determine its value. What’s more, external buyers may value particular aspects of your business than other potential acquirers. Basically, it’ll depend on who is conducting the appraisal.

There are, however, some universal factors that, because of hard numbers and data, will be looked at to come to calculate a valuation – and, if you have your ducks in a row, hopefully a number that meets your needs for the future.

1. Market Multiple

First up is understanding the valuation formula is V = P x M, where P is a performance measure (usually profit, gross margin dollars or revenue) and M is the market multiple applied to your business. The multiple is based on your specific industry, the size of your company relative to other is the industry and the expected return on investment for business buyers.

2. Earnings History

Any acquirer worth their salt will want to have sight of a business’s performance “P” history, when it comes to earnings.

Revenue and profit trends are a telling way to understand how the business has performed in the past. The history of this performance will be benchmarked against other companies in your industry to determine if you perform the same as your peers, on average, or underperform or overperform.

3. Potential Growth

Then, after looking at the bygone days of a business’s market performance, acquirers will turn to its possible future profitability. Thus, the “M” in the formula above is the buyers’ expectations regarding whether future earnings will stay the same, grow or decline over time.

Destined works with its clients to not only maximize the “P” in advance of a sale, but also to identify the items that acquirers will want to see to give them comfort that they are buying a business that will continue to grow and thrive. Because a business that’s projecting good growth for the future, is a very desirable entity – one that any buyer would want to take the reins of or absorb into an already established organization.

These are just some of the business valuation factors that could arise when you take the step to determine your business’s worth. Like seeing a kid off to college, letting a business go can tug on our entrepreneurial heart strings, but it just may be the best move for you and your business.

And if you’re not quite ready but want to look into building a good exit strategy for the future, Destined can help, we’ll get you to that profitable sale – because your journey is our journey.