Valuing a Business Using Profit

Emerald Coast Brokers can help you value your business. Let us help you sell
your business!

What is the Value of My Business?

This question has likely been asked by every business owner, regardless of intent to sell. The
easy answer is: Your business is worth what someone is willing to pay for it. Still, to list a
business to sell, you must have some idea of the value first.

Valuing a Business Using Profit

There are several ways to value a business. This post is going to focus on valuing a business
based on profit. Here’s the simple formula for valuing a business using profit:

value = adjusted net profit x profit multiplier

Calculating Adjusted Net Profit

Net profit is simply the revenue your company brings in minus the operational expenses.
Adjusted net profit has to account for external market information. For example, if you pay
yourself a salary below the market standard your net profit needs to be lowered. The opposite is
true if you pay yourself a salary above market standard.

Determining a Profit Multiplier

A profit multiplier is a number that usually ranges between 2 and 6. A 4 is common multiplier and
good rough estimate for starters. However, a good business broker can help you determine the
correct multiplier. Common factors that affect the profit multiplier are:

1) The type of business – Conventional multipliers likely exist within your business type.

2) Size of the business – Smaller business usually have a lower profit multiplier.

2) Risk factors – The lower the risk the higher the profit multiplier.

3) Sustainability – Sustainable profit means a higher multiplier.

Why Talk to a Business Broker

Whether you are serious about selling your business or just checking your options, a good
business broker is crucial to understanding the value of your business. A good broker should:

●Know the local market – selling a business on the emerald coast can be different than
selling in other areas.

●Understand net profit adjustments – knowing what to adjust will help you enter the
market at the right price.

●Determine the optimal multiplier – the proper profit multiplier takes advantage of the
potential upside to your business and means you can maximize the value of your
business.

Leave a Reply