Money Matters

How to Determine the Value of Your Business

Like other entrepreneurs, from time to time salon owners wonder about the value of their business. Most businesspeople know their value of their investment holdings, car, house, and even their jewelry, but they do not know the value of their business. They may have a dollar amount in their head, but this dollar amount is often inaccurate. Many business owner under estimate their company’s worth. The reason that most of them do not know the value is because there is not a comparison for reference. Your business is a unique entity with a value. The following is one of several valuation formulas that can be used to assist you with answering this question.

Determining a fair market value for your business can be a complex process. There are components to this equation that are often debated by business experts. When the time comes to sell your business, consult with a business broker to verify your estimated value is accurate, because certain variables could adjust your price. Examples of these variables are consistent growth patterns, supply and demand in your market area, and unique service or products available only at your salon. There are other methods for valuing you business, but the following is the most simplistic and realistic approach for determining a dollar value.

After the explanations below, fill in the blanks on lines 1,2,3, and 4 with dollar amounts, then total

  1. Real estate value:        $________________
  2. Furniture, Fixture, and equipment:  +$________________
  3. Inventory (at cost)           +$________________
  4. One year cash flow:   +$________________

Total Fair market value     $________________

 

  1. Real estate value. If your business is in a leased facilities, enter a 0 on line 1 and move to line 2. If you own the building that your salon is enter the building’s estimated value. This can be achieve by several methods: 1.) by doubling the state’s equalized value; 2.) using the replacement value of collars per square foot commensurate with your market area; 3) researching comparables; or 4) using a recent appraisal of your building, if you are fortunate enough to have one
  2. Furniture, fixtures, and equipment. Create a list of all items in our business. Be extremely thorough. Start at the front door of your salon and itemize everything that is in your establishment. Use a two-column method, writing an item in one column and putting an estimated current price for that item in the corresponding next column. Be accurate and fair with your estimated values; a manicuring station that cost $750 five years ago is not still worth that. A good rule of thumb on used equipment and furnishing is 50% of its original value. Do not miss anything in your salon; this will result in shorting yourself in your total market value. Then total the dollars values and enter this number in item number two of the equation. Although this is the most time consuming step, it is the most useful and important. Upon completing this list, put a copy of it in safe place off-site. If there is ever a fire, theft, or loss due to unforeseen circumstances, you will have a reference of the contents of your business.
  3. Inventory. Your inventory value is at cost. It would be best to itemize this also, but you could simply count your retail and back bar supply. If your salon has a substantial retail center or an extensive back bar supply, it is advised to use the two-column method described above. Enter the dollar amount on line 3.
  4. Cash flow. This is not the same as net profit, but the net profit is the starting point. Use your previous year’s tax return for your business. Start with the net profit or loss, and then add back the tax deductions you took that were not really money that came out of your business funds. Such deductions are depreciation, owner’s salary, non-reoccurring expenses, travel and entertainment, car expense, cell phone expense, and other owner discretionary expense. Tax returns are for the purpose of determining your taxable amount and, of course, you and your accountant keep that as low as legally possible. Cash flow id the true amount of cash that an owner acquired throughout the year. Enter one year’s cash flow on line 4.

Now total lines 1-4 find the fair market value.

You know what most business owners do not – the value of your business. This is the most-used method by business brokers. You can always call a representative of Empire Business Brokers and they will guide you through this process.

Targeting the price for the purpose of selling is often considered an art rather than a science. This is because the exact right value is what an informed, ready, willing, and able seller will accept for their business. Therefore all business owners should always have in mind a realistic vision of the accurate target value of their business.

Sharon Matle is a nail technician at Silk Salon in Dearbon, Mich., and a license business broker with Empire Business Brokers.

Keywords:   selling a business     valuing your business  

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