Cream of the Crop features a rotating panel from the Harvest Group, a landscape business consulting company.
If I sell, will I have enough net proceeds (after taxes, after paying off debt and other obligations, etc.) to do the things I want to do? What other deal terms might affect me? How do I know if what I have heard is realistic for my company? These are important questions for most business owners – and especially personal to those who have spent their lives building their business.
Business valuation is far from an exact science. In most cases, the market (the buyer) determines what something is worth. The exception is having a business valued for an ESOP, a divorce or other special cases where specific formulas must be used. These may be legally required and vary by state. If the business is going to be for sale on the open market, will it be an asset or a stock sale? Which assets will be included? There may be several “correct” answers for one company.
To get a value for your business, let’s look at it from the buyer’s perspective. There are multiple methods and formulas that are used to value a landscaping business, each with its pros and cons. The most common are:
- Multiple of reconstructed EBITDA adding back discretionary items and excess owner’s compensation. Downside: Based on three- to five-year historical results which may not reflect future, limited private company transaction data, capital expenses not included.
- Present value of future cash flows discounted for risk and liquidity. Downside: Based on the accuracy of assumptions for forecast. Use of an “appropriate” discount rate.
- Percentage of sales (multiple or fraction of). Downside: Limited insight into company’s operations, lack of comparable data from private companies.
Which is right? The right formula is the one the buyer thinks is right and the seller is willing to accept. Your adviser will apply at least two methods and check the value range to see if it makes sense. A good “reasonableness check” is to project the business’ cash flows with the debt service and other obligations added in. It is doubtful a buyer would want to go beyond the business’ cash flow to service the debt.
The range of multiples in the general marketplace* are listed above. Companies with an enterprise value of greater than $5 million or more are in greatest demand. This is consistent within the industry.
Sellers wanting unjustifiable high prices contribute to the statistic that over 48 percent of small businesses are not sold.** A seller with an unrealistic view of his company’s sale price is a person who never sells his business.
Your adviser will work with you based on knowledge of your business, the industry and the marketplace to give you a business valuation. This is often an opportunity to identify strengths and weaknesses from the buyer’s perspective that may result in an action plan to improve the value.