What's My Business Worth?

Probably one of the most common questions business owners ask is "What is my business worth?". Perhaps you want to do some retirement planning, succession planning, divorce planning, estate planning, etc.. This simple question has no simple answer, however. Valuations differ based on their purpose. For instance, the courts and accountants focus on a "Fair Market Value" without compulsion. For the sale of a business, brokers and valuation experts create a "Most Probable Selling Price" that takes the current market conditions into consideration. Let's assume we're looking to sell our business, and we want a valuation.

There are three main approaches to determining a most probable selling price:

1) Market Approach
2) Income Approach
3) Asset Approach

The market approach is based on the comparison of "similar" businesses that have sold when compared to ours, then projecting a value for your business. The principle of substitution would suggest that this is a reasonable way to come up with a valuation. There are several problems, such as comparing businesses in different parts of the country, or even state that might make this comparison inaccurate since local economic conditions vary. Also, comparing companies of significantly different sizes can skew the results since buyers typically pay higher multiples for larger companies.

The income approach looks at a view that presumes that a business is a cash generation machine, and you should compare your business to any other investment that generates cash. The big difference here is that small business is risky, so an accommodation for risk needs to be built in. A key part of the process is to identify the cash coming from the business through a process known as recasting. Recasting will take tax returns or financial reports and estimate the cash flow of the business that benefits the owner. This is often referred to as "Sellers Discretionary Cash Flow" (SDCF) or "Seller's Discretionary Earnings" (SDE), or something similar. This cash flow number is then multiplied by industry specific ratios to estimate a value. Other variations on this method include a capitalization rate applied to the SDCF or looking forward and estimating the SDCF for several years and calculating the net present value of that cash flow (what the sum of future benefits is worth today).

Finally, the asset approach depends on the fair market value of the company's assets. This is sometimes called the cost approach, since it deals with the physical assets of the business, and doesn't provide much value for goodwill. In most businesses, goodwill is the majority of the value of the business. This approach is most useful for unprofitable businesses or businesses that have a significant investment in equipment or other assets.

Ultimately, the market determines the price of the business. Because every business is unique, expect negotiation on the price. Buyers buy the whole package, it's not just price, but the perceived risk of the business, the prestige of owning that business, the volatility of earnings, strength of the industry, the local economy and a host of other factors not easily quantified. The opinion of value is the start of the discussion on what the business will actually sell for. You should get some help when its time to price your business.

Choosing Office Space - Bring A Checklist

So, you're just starting a business, and you're finding yourself overwhelmed with the task of locating an office that will accommodate your needs without breaking your budget. Choosing office space can be complicated, because you're counting on the amount of business you do to offset the costs of leasing the space and staffing it with employees. In these uncertain economic times, many new and smaller businesses that only have a few employees are opting for virtual office space or executive suites instead of the traditional office space with a long term lease. No matter which type of space you choose for your business, there are some considerations that you should always keep in mind on your quest to lease office space.

When you set out to find office space, it is important that you make a list of the most important aspects of the space before you talk to a leasing agent or even make a phone call in response to one classified advertisement. Essential to this list is that you keep in the back of your mind exactly what you need, not what you want to function. These needs include the actual amount of space you need to function, not feel like a corporate executive; the communications access that you need to stay in touch with your clients on a regular basis, like internet and commercial telephone services, and last, but not least, the realistic amount of money you have to spend on an office.

When you are looking to lease an office, the amount of actual square footage you need depends greatly on the type of business you are hoping to run. If you're going to be running a clothing store or design studio, you will need more space than someone who is developing and running a web site or a consultancy.

If you have considered all of the office space that is available for lease around your geographical location and have determined that nothing is very well suited to your needs or to your budget, you might want to consider a executive suite office instead. These are typically single suites that are available within a professional office building. The benefits of executive office space include professional receptionist services, access to conference rooms, internet and phone services, and, in most cases, spaces that are already furnished with chairs, desks, and filing cabinets.