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© 2013
Gary E. Cooke II

How much is your business worth?

If you are in the process of buying a business, what is a fair price?

A structured and rational review the companyÕs financial position is necessary to determine the value of your business. Valuations are important in showing lenders the businesses worth and in examining a fair purchase or sale price.

Professionally licensed appraisers are often used, but a business owner can get a rough idea of the businesses value before bringing in other professionals.

Several methods are used to determine the fair value of a business. While the best valuation equation can differ depending on the business, three are routinely used. They are: Discounted Cash Flow; Capitalization of Gross Revenues; and Cash Flow Analysis.

Discounted Cash Flow
After projecting the company's annual cash flow for each year over ten (10) years and deducting expenses, the present value of an expected future benefitsÕ stream is determined. This present value tells a business owner how much the business is worth today.

Capitalization of Gross Revenues
While an owner can use the ÒComparable Company ApproachÓ (or ÒGuideline Company ApproachÓ) to compare such things as capital structure, credit status, management, personnel, competition, earnings, expenses, dividend paying capacity or the book value of the business to other companies, this can be extremely complex. However, by generally comparing companies similar to your business in industry, size, growth, economic conditions and recent acquisitions a comparible multiplier provides a valuation benchmark.

So for example, in a particular personal service business the multiplier is 1.7. Companies in that line of business are selling for 1.7 times gross revenues. First take the most recent full year of gross revenue and add a portion of the expected current year sales reflecting current growth. If gross revenues are $350,000, multiply that by 1.7, and arrive at a business value of $595,000.00.

Cash Flow Analysis
Under the Cash Flow Analysis method, subtract the average annual Capital Expenditures from the average Net Cash Flow over a ten year period. This calculation determines how large a loan cash flow would support or how much a buyer could borrow to purchase the company.

If you are interested in discussing the value of your business and potential opportunities available to you, please feel free to contact Mr. Cooke at (312) 497-9002 or by email at "gc@Cookeslaw.com".

Mr. Cooke's fee is $300.00 per hour.