FOR BROKERS: Business Valuation

BY ROBERT FREEDMAN

What to do when . . .

It’s time to determine what your brokerage is worth
Whether you’re planning to sell your brokerage or you otherwise need to put a dollar value on it—you intend to leave your business to someone, for example—you’ll want to get the best estimate you can on its worth. Getting to that figure involves a simple process that’s built around evaluation factors, such as company operating performance.
But you’ll also need to fill in a few blanks on other matters: for instance, who interested buyers are if you’re selling and what improvements would beef up your valuation whether or not you’re selling.

Go with a pro

Professional evaluators say your best bet is to hire one of them, because they valuate businesses every day and stay up on changing tax laws and market conditions that impact value. “If you use your accountant, you might save a few pennies but you’ll miss the professional evaluator’s expertise on valuation matters,” such as market comparables, says Scott Gabehart, principal of Gabehart Valuation Services in Phoenix.

One source for evaluators is the Institute of Business Appraisers (www.go-iba.org), which offers a certified business appraiser (CBA) designation for those meeting the group’s education and performance criteria. If you hire an evaluator, be clear on your purpose, because you’ll need a more detailed report—and thus a more costly one—if you’re selling than if you’re planning your estate. “Buyers will demand more detail,” says Gabehart.

Report details and costs vary greatly, from a simple oral report that might take three hours to prepare at about $200 an hour, to a summary written report that might take 12 hours at about the same hourly rate, to a comprehensive written report that’s usually priced between $5,000 and $30,000, depending on your business’s size and complexity and the reason for the valuation.

Factoring value

Evaluation factors include:

Your company’s strategic value. What niche does it serve? What are its intangible assets—the client base, experience of your associates, and value of your brand name? - Its financial performance, both over time and as compared with like companies, and normalized t

You’ll also need to look at external factors—primarily the economic climate, both on a macro level (are housing sales nationally heading up or down?) and on a micro level (is your local market seeing job gains?).

Once the factors are assigned a value, you determine what’s known as the company’s adjusted earnings before interest, taxes, deductions, and appreciation (EBITDA) or cash flow. Then you construct the price using a multiple, such as two times EBITDA. Thus, if your adjusted EBITDA is $200,000, the multiple might bring the value to $400,000. The multiple might be as high as six times EBITDA, with higher multiples applied to companies based on size, profitability, pending sales volume, and size of the listing base.

In a sale, that $400,000 won’t necessarily be the final price. Buyers like to pay based on actual performance. So contracts often will include an earn out formula to allow for price adjustments over a specified term.

Also, the offer will tend to be higher or lower based on the buyer. Big buyers, known as “strategic buyers,” tend to offer more because efficiencies based on their size let them squeeze more profit out of your business. Buyer and seller motivation also factor into the size of the offering.

Whatever your goals for valuing our company, it makes sense to enhance value by cleaning up your balance sheet. For example, reduce your salary and put the difference into profit, spruce up your physical office, or enhance your operations by hiring a professional manager. “Be proactive,” says Gabehart. “There’s a lot you can do to make your brokerage worth more.”

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Business Value