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Business Valuation Calgary Services

What is the ‘right’ price for your business – and why is it the right price? Answering these questions correctly sets the stage for a successful transaction. Pricing your company too high will keep buyers away; pricing it too low will decrease the return on your investment in your business.

Business valuation is not an exact science. Many factors affect the value of a business including, but not limited to:

  • Competition
  • Buyer market
  • Stability of labour force
  • Customer base
  • Owner involvement
  • Revenue
  • Age of business
  • Profitability trend
  • Type of sale (asset or share)
  • Availability of vendor financing
iqoncept / 123RF Stock Photo

Determining value requires an understanding of all the possible factors and how they interact with one another. It’s a complicated process, made easier by experience. At The Alberta Business Exchange, we have the experience in business sales in the Alberta market to guide you in establishing a realistic selling price.

Whether you simply want to understand what the value of your business is today for your own information, or if you are in the midst of a partner buyout or re-financing, we can help.

The Art & Science Of Business Valuation

Business valuation is a mix of art and science. The numbers that represent your business are the science; however, the way those numbers are interpreted can be very subjective and depends on several factors.

Whether you are considering selling your business now or sometime in the future, it’s critical that you understand the fundamental factors that a buyer will look at before making an offer. This allows you to position your business to obtain the highest purchase price when the time comes to sell and also gives you peace of mind that you received a fair deal.

The 4 Major Valuation Approaches

1. Earnings-Based Approach: Cash Flow

The most common and most effective method for valuing a business for sale is an earnings-based approach or, more accurately, a cash flow approach.

The logic is simple: buyers want to know what their return on investment (ROI) will be, and the only way they can do that is to estimate what the future cash flow of your business will be once they’ve taken over.

Cash flow is not to be confused with net income (revenue minus expenses). Net income includes expenses that aren’t actually cash, such as depreciation, and other items that aren’t relevant to the buyer.

EBITDA & Seller’s Discretionary Earnings (SDE)

EBITDA and SDE are the most common methods for valuing a business for sale.

EBITDA (Earnings Before Taxes, Depreciation, and Amortization) is the most commonly used method of valuing businesses with revenues of about $1 million and higher, and usually providing products or services to other businesses (B2B). Cash flow is calculated by adding non-cash items—taxes, depreciation, and amortization—to the company’s earnings.

Seller’s Discretionary Earnings is most often used to value “main-street” businesses with revenues less than $1 million. Main-street businesses are typically smaller, local businesses that are owner-managed and cater to consumers (B2C). Cash flow is calculated similarly to EBITDA but the owner’s salary is added back.

We use a normalized EBITDA method because we do not serve main-street businesses.

2. Asset-Based Approach

Many business owners assume that the value of a business is related to the value of its assets (i.e., shop and office equipment, inventory, furniture and fixtures, etc.). But buyers don’t really care how much you have invested in those assets; the value is meaningless if those assets don’t generate much income. A business is only worth its asset value when it’s being liquidated.

3. Market-Based Approach

This approach assumes your business is worth roughly the same amount as other similar businesses that have been sold. While this seems to make sense, there are two major reasons it isn’t an effective approach:

  • A lack of comparable data. While it’s relatively easy to value a house for sale based on comparable sales, there is a lack of data on comparable business sales.
  • No two businesses are alike. Even two businesses in the same industry with the same level of revenue can sell for very different amounts because of differences in qualitative factors.
4. Cost To Re-Create Approach

This method is often used when significant research and development has been done in a business and has yet to be marketed.  The buyer would have detailed knowledge of the industry and how to take what has been developed to market.  Usually the development pertains to software.

Business Valuation Report

It’s very easy to get caught up in all the formulas, industry standards, and different business valuation methods. That’s why we designed our ‘Business Valuation Model,’ which is intended to help the average business owner understand how business value is derived in a straightforward and logical way.

After providing more than 5,000 opinions of value over the past decade, we are well positioned to provide you with a comprehensive report on the value of your business. If you would like to know what your business is worth, contact us to order your business valuation report.

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