What Is My Arizona Business Worth?
One of the first questions business owners ask me is:
"Phil, what is my business worth?"
The honest answer is that it's worth what a ready, willing and able buyer is willing to pay for it.
Every business is different. Two companies with the same annual sales can have dramatically different values. The only way to estimate what your business is really worth is to carefully analyze your financial statements and understand the factors that buyers care about most.
Fortunately, the valuation process isn't a mystery.
It Starts With Your True Earnings
Many business owners assume their tax return tells the whole story.
It doesn't always.
Your accountant's job is to legally minimize your taxes so sometimes your tax returns do not match your internal Profit & Loss Statements. My job is to determine what your business is really earning.
For most small and mid-sized businesses, buyers value the company based on Seller's Discretionary Earnings (SDE).
SDE represents the total financial benefit the owner receives from the business. It includes the owner's salary along with legitimate add-backs such as personal expenses, one-time costs, or other discretionary expenses that a new owner would not incur.
Larger businesses that have a management team already running the company are often valued using Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) instead.
Not Every Expense Can Be Added Back
One of the biggest mistakes I see is assuming every questionable expense automatically increases the value.
It doesn't.
Every add-back must be legitimate, well documented, and defensible.
For example, if your profit & loss statement includes a "Meals" expense, that may be an appropriate add-back.
But if your business regularly takes an important customer to lunch to maintain a relationship, that expense is probably necessary for the business to continue operating. A buyer will expect that cost to continue.
This is one reason why I don't rely on automated valuation software programs or AI generated valuations.
The Multiple Matters
Once the true earnings have been determined, buyers apply a valuation multiple.
The multiple depends on several factors, including:
- The stability of the earnings
- Customer concentration
- Industry risk
- Growth potential
- How dependent the business is on the owner
- The strength of the management team
- Whether revenue is recurring
- Current market demand
The lower the risk, the higher the multiple.
Revenue Doesn't Determine Value
I often hear owners say, "My business does $3 million a year in revenue. How much is it worth?"
Revenue alone tells me very little.
A company generating $3 million in sales with strong profits, loyal customers, and systems that operate without the owner may be worth significantly more than another company with identical sales but shrinking profits and heavy owner involvement.
Buyers purchase earnings, not revenue.
Why Online Valuation Calculators Are Often Wrong
There are dozens of websites that promise to tell you what your business is worth in less than a minute.
Unfortunately, they don't know your business.
They don't know which expenses are discretionary.
They don't know whether a large customer relationship depends entirely on you.
They don't know if your employees are likely to stay after the sale.
They simply plug numbers into a formula.
When I perform a valuation, I personally review your financial statements line by line. I ask questions that software programs don't ask because every business has unique circumstances that affect its value.
Pricing Your Business Correctly Is Critical
Overpricing a business is one of the biggest reasons businesses fail to sell.
I occasionally meet owners who have been told their business is worth twice what I believe it is worth. Sometimes another broker simply wants the listing, so they will tell the owner what they want to hear.
I'd rather lose the listing than watch a seller waste a year on the market with no serious offers.
My goal is to recommend a price that is realistic, defensible, and supported by comparable sales and/or financial documentation so buyers, lenders, accountants, and appraisers can all justify it.
Do You Need A Formal Appraisal?
Usually not.
Formal business appraisals are often used for divorce proceedings, estate planning, shareholder disputes, or litigation.
If your goal is to sell your business, what you typically need is an experienced business broker who understands the market, has access to comparable sales, and can provide a realistic opinion of value.
Why Sellers Hire Me
I personally perform the valuation on every business I list. I don't outsource it.
As a Master Certified Business Intermediary (MCBI), a designation held by only three other business brokers in Arizona, I have valued hundreds of privately held businesses across many different industries.
My goal isn't to tell you what you want to hear. It's to tell you what the market is likely to pay.
That honest advice helps my clients sell their businesses faster and for the highest realistic price.
Find Out What Your Business Is Worth
If you're thinking about selling your business, whether that's this year or several years from now, I would be happy to provide a free confidential, no-obligation valuation.
We'll review your financial statements together, discuss the factors that affect value, and I'll explain exactly how I arrived at my estimate.
Even if you're not ready to sell today, you'll be left with a much better understanding of what your business is worth and what you can do to increase its value before going to market.
This article is general information about business valuation in Arizona, not legal, tax, or financial advice. It is not a quote or an appraisal of any particular business. Talk to a qualified attorney or CPA about your own situation before acting.