How to value a business? In this post, we will be exploring the best method how to value a California company in the lower middle market segment.
Knowing the exact value of your company is crucial and there are several business valuation methods when it comes to determining the value of lower-middle market businesses.
How to Value a Lower Middle Market Business Quickly
Valuation methods usually use the worth of your company’s liquid assets, equipment, property, or anything else of economic value that your small and mid-size business owns.
So which is the best business valuation approach to calculate the value of your lower middle market company?
According to experts, EBITDA (otherwise known as earnings before interest, taxes, depreciation, and amortization) is one of the best business valuation calculations for businesses in the lower middle market in California.
The EBITDA business valuation method brings out a business’s operating performance. This plays an important role in determining the value of a mid-size company.
According to many retiring business owners, EBITDA is very straightforward when it comes to calculating and determining your company's value. Another reason why this service company valuation method is preferable is that it is widely used by business sellers and buyers in California, and everywhere else.
The best approach is to do some research to find the industry average multiples. This is the best way to calculate EBITDA multiples to find your business value quickly.
Next, take the industry average multiple and multiply your company's EBITDA with it.
For example, your lower middle market company has a revenue of $5m and an EBITDA of $3.5m. To calculate the EBITDA multiples, let's say the industry average multiple is 2.5x of EBITDA. The formula to calculate your business value will be business value = EBITDA x 2.5 ($8,750,000 = $3,500,000 x 2.5).
EBITDA Valuation Multiples for Lower Mid-Market Businesses
This business valuation calculation method excludes expenses such as tax, and debts, among others, to portray a raw indication of a lower middle market business' earnings, therefore, demonstrating its value.
There are two formulas you can use here:
- EBITDA= operating profit+ depreciation+ amortization
- EBITDA= net income+ interest + taxes + depreciation + amortization
Here is a more in-depth explanation of EBITDA’s components.
Interest
Interest is eliminated when calculating a service company’s value because it depends on its financial or capital structure. Since the capital structure varies from one business to another, the financial structure is always excluded to easily compare the value of different companies.
Interest, in this case, includes a company’s financial expenses, such as the interest rate on loans acquired from third-party lenders or banks.
Taxes
This component consists of any state, federal income, and local taxes imposed on a business by the government and other tax regulatory authorities.
Deductions
Deductions comprise any non-cash expenses that show a reduction in a company's value.
Amortization
This component consists of expenses such as the cost of intangible assets.
EBITDA Multiples
This is an industry average multiple that can be found in industry publications or consulting with a valuation expert.
The following are some common valuation multiples for small businesses:
- Retail: 0.5 – 1.5 times EBITDA
- Restaurants: 0.5 – 2.0 times EBITDA
- Manufacturing: 0.5 – 3.0 times EBITDA
- Service businesses: 1.0 – 4.0 times EBITDA
- Software-as-a-service: 4.0 – 8.0 times EBITDA
Source:Pepperdine Private Capital Markets Report
This multiple is then taken and applied to a business valuation calculation as demonstrated above.
If this getting too complex for you, it is best to ask an expert to give you more insights about your specific industry niche and its average multiple to find your small and mid-size company's worth quickly.
Keep note that to get the best accurate valuations, you must apply other factors and use multiple calculations to come up with a broker's opinion of valuation.
How to Increase Business Value in a Small and Mid-Size Company
Any retiring business owner in California would want to increase the value of their business. Luckily, there are many ways to build up your business' value. However, it is important first to identify what affects the value of your lower middle market company.
Finances
This is one of the major factors that affect the value of your SMB, small and medium-sized business. So, how exactly do finances affect the worth of your company? For starters, how you control costs or expenses in your business significantly determines its worth.
Your company's past, current, and projected cash flow and profits also play a significant role in determining its value.
Your Assets and Liabilities
This includes the value of your company’s properties and debtors.
External Factors
Some factors may be out of your control that could also significantly affect the value of your service business. These include the level of demand for your products or services, the level of competition, and how similar businesses are valued, among others like the economic environment.
Boost Your Profits in your Lower Middle Market Business
Your company’s profits greatly affect its value because it will determine whether or not you will have people interested in investing in the business. Increasing your business’s profits mainly involves decreasing costs and increasing sales revenue.
One way to boost your company’s profits is to eliminate unprofitable services or products. You can also aim at reducing the costs of supplies and strategically increasing the prices of your products or services.
Increase Sales and Reduce Expenses
One of the best ways to increase your sales is by improving your marketing strategy. You could also lower your company's expenses by reducing production costs, and lowering supply expenses.
Involve an Expert
This is important, especially if you are preparing to sell your lower middle market business. Hiring a professional business M&A advisor to help you correctly calculate the worth of your business, also can help you save a lot of time by eliminating guesswork.
Prepare to Sell Your Business With The Help of a Broker
A lot goes into preparing to sell your small and mid-size business in California. From negotiating with potential buyers to determining the exact value of your company. While you may know everything concerning your business, having an M&A broker by your side will help you navigate smoothly through the M&A selling process.
Here are ways in which an M&A advisor can help you determine the value of your lower middle market business and sell it for the right price.
Helping You Understand Your Industry
Of course, you understand your industry, but an M&A advisor will help you know what makes your company unique. An M&A broker will also help you get acquainted with your industry’s current trends to help you better prepare your small and mid-size company for sale in California.
Helping You Determine Your Company's Worth
Determining the exact value of your business in the lower middle market can help you know what to do to increase its value and determine the right asking price. An M&A advisor can help you calculate the true value of your business by conducting thorough research on your company’s performance and finances.
Helping You Negotiate the Right Price for Your Company
No one will know how much your business is worth more than an M&A advisor. This is because they will take their time to evaluate your business’s performance, profits, and overall worth. An M&A advisor is, therefore, the right person to help you negotiate the perfect asking price for your company.
Company Valuation Multiples: Hire an Expert
While there are many methods to determine the value of your business in California, the EBITDA business valuation approach is recommendable. It focuses on a company’s operating performance, which gives a true picture of a business’s value.
Determining the value of your lower middle market business will go a long way in helping you know what to ask for when selling your lower middle market company. While it can be an overwhelming process, having a certified M&A advisor by your side can make things easier and help you get your company's worth.
Download a business valuation sample: Download PDF
If you are aretiring business ownerlooking to exit your lower middle market business in California, here are five tips to get you started:
1.Don't wait until the last minute tostart planning your exit.The process of selling a lower middle market business can take a long time, so it's important to start early.
2.Have a clear idea of what you want to get out of the sale.Know your goalsand what you're willing to negotiate.
3.Choose the right type of buyer.Not all buyers are created equal, so do your research and find the right one for your business.
4.Be prepared for a lot of due diligence.is when buyers will want to know everything about your business, so be ready to provide documentation and answer questions.
5.Be flexible with the terms and conditions of the deal.It's important to be open to negotiation to get the best possible deal for your business.
Rogerson Business Services, also known as, California'slower middle market business brokeris athat has closed hundreds of lower middle-market deals in California. We are dedicated to helping our clients maximize value and achieve their desired outcomes.
We have a deep understanding of the Californian market and an extensive network of buyers, which allows us to get the best possible price for our clients. We also provide comprehensive support throughout the entire process, from initial valuation to post-closing integration.
Our hands-on approach and commitment to our client's success set us apart from other firms in the industry. If you consider selling your lower middle market business, we would be honored to help you navigate theprocessand realize your goals.
If you have decided to value and then sell your lower middle market business or still not ready,get started here, or call toll-free 1-844-414-9600and leave a voice message with your question and get it answered within 24 hours. The deal team is spearheaded byAndrew Rogerson, Certified M&A Advisor, he will personally review and understand your pain point/s and prioritize your inquiry with Rogerson Business Services, RBS Advisors.
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