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  • Business Valuation for “Main Street” Businesses

    Jul 6, 2015

    IBA is recognized in the Pacific Northwest by entrepreneurs, business owners, and the legal, accounting, wealth management, and banking communities as one of the premier regional experts on the value of privately held companies & family owned businesses because all of our business evaluations are done “in house” by professionals with the ability to combine accounting & investment valuation practices with market knowledge gained from successfully facilitating over 4000 transactions. Traditionally, the evaluation projects on IBA desks involve middle market, privately held companies with EBITDA’s ranging from mid six figures to several million dollars and are done on a complimentary basis for business owners considering engaging IBA as a professional representation firm to facilitate the sale of their company as a method to demonstrate our knowledge, experience, and professionalism. However, our firm also has a philosophy of service to the business community and each year takes on projects where business evaluations are performed for a fee or smaller businesses are represented for sale to help business owners referred to us from our professional network or who have a compelling story or business model. It is one of IBA’s core beliefs that all business owners deserve quality representation during the sale of their businesses by a knowledgeable, experienced, professional business broker. Unfortunately, IBA does not have the ability to serve all business owners in the Pacific Northwest and frequently passes on representation projects.

    The most common representation projects passed on by IBA are on “Main Street”. In the business brokerage world, “Main Street” refers to the businesses traditionally found at street level in the downtown area of most metropolitan areas. These businesses predominantly operate in the retail & food service sectors and serve as one of the cornerstones to our economy. They are also the most common venues for entrepreneurship in America. The primary reason for our firm passing on these representation opportunities is that they do not clear the profitability & transaction size thresholds we desire for projects. This selection process philosophically conflicts with IBA’s desire to serve the general business community as an information resource to entrepreneurs. To help reconcile these conflicting goals, the following information is provided to help owners of “Main Street” businesses with revenues of $250,000 – $750,000 establish a basic value for their retail or food service businesses.

    The first step in a basic business valuation process is to value the tangible assets of the business. The tangible assets of a retail or food service business are generally composed of equipment, leasehold improvements, vehicles, inventory, and supplies. Inventory & supplies in a transaction are traditionally valued at the lower of cost or replacement value. Equipment and vehicles are valued in a business sale transaction on a spectrum ranging from liquidation value to replacement value. A straight forward way for business owners to value these assets is to ask themselves what they would pay for them, if they were buying the assets at a “fair” value from another business owner to facilitate expansion. The most difficult tangible assets to value are leasehold improvements. Leasehold improvements are improvements to the space that are built in and problematic to relocate to an alternative location. Leasehold improvements can be very expensive to add to a space. It is this cost that creates the incentive for new restaurants to go into spaces previously occupied by failed restaurants to take advantage of infrastructure in place like kitchen ventilation systems, grease traps, and exterior signage. Unfortunately, when these items are included in the package associated with the sale of an operating business, limited value is placed on them by a buyer. Adding up the value of all tangible assets of a business establishes the foundation of the basic valuation model for a “Main Street” business.

    The tangible asset value established, the next step is to value the intangible assets, commonly referred to as goodwill or blue sky, of the business. Valuation of this asset in larger transactions is subjective science that requires a significant amount of experience & knowledge. However, in smaller transactions a simple rule of thumb generally can get a business owner in the “ballpark” for valuing the goodwill of a business. The simple rule of thumb is that the goodwill value in a business generating less than $100,000 of income for an owner in the form of salary, profit, and discretionary benefits is roughly equal to what the owner of the business earns as an owner/manager of the business. This intangible asset value when combined with the tangible asset value generates a basic value for the business that is typically within 10% of the market value that would be achieved in “good faith” negotiation between a buyer & seller in a business purchase & sale transaction. The true value of a business is always what a willing buyer & willing seller agree to in a “good faith” negotiation in an environment where neither party is motivated to complete the transaction more than the other party.

    Francis Bacon famously said, “Knowledge is Power”. The information provided is a starting point for accurately valuing a food service or retail business with revenues between $250,000 – $750,000. It should also be noted that the margin for error for the valuation model increases when revenues exceed $750,000 or owner cash flow exceeds $100,000. If either or both of those thresholds are exceeded, it is recommended that the business owner employ an expert to help them establish the market value of their business.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.

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