At some point, many business owners ask themselves, “What’s my company worth”? Often business owners think they know the value of their company, simply because they live it every day; however, a business’s value can vary depending on a wide variety of factors, which is why business appraisals are recommended.
During an appraisal, the value of a business can be derived primarily from its assets or the benefit stream (earnings or cash flow) that the business provides its equity owners. When restaurant transactions occur, they are sold based primarily on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), assuming that the company leases their site from an unrelated lessor and real estate ownership is not an issue. However, should that EBITDA number be an indication of the benefit stream to the current owner or should it be the EBITDA benefit stream that a potential buyer can expect? This is where a business appraiser can be beneficial to a seller.
The EBITDA benefit stream should be the normalized stream that an unrelated, third-party buyer can expect from the company. This usually makes the company more attractive to potential acquirers because it strips away all the non-business items that may be dragging down the restaurant’s bottom line. For instance, if the owner is taking out a salary greater than the market rate that would need to be paid to a non-owner to take over their title and responsibilities, then the excess compensation is added back (normalized) to the earnings/EBITDA stream. This enhances the number that is applied to the value multiple and enhances the business’s value. An appraiser would consider these types of issues when valuing the company. (It should be noted that there are many other normalization factors to consider.)
An appraiser can also advise on which ownership perspective should be valued in a business. For instance, if an owner of 90 percent of a business’ stock is looking to acquire the remaining 10 percent, the majority owner may initially determine value for the entire company and pay the 10 percent owner their pro rata portion of the estimated value. An appraiser may advise the majority owner that the valuation perspective of the transaction should be from the minority owner’s position. If that is the case, then the value for the 10 percent could be considerably lower than the pro rata portion of the business’ enterprise value, given the minority shareholders inability to, for instance, materially affect or implement corporate change or policy.
There are numerous reasons why a business appraisal should be done, such as divorce proceedings, succession planning, or the potential sale of a business. There are also a great many factors that an appraiser must consider while performing the analysis. Therefore, it may be recommended or even required that an accredited business appraiser be engaged to make sure valuation methodologies are consistently and correctly applied, and also to ensure that the goals of the business and its owner(s) are accomplished.
If you have questions or would like an appraisal done on your business, contact a BDO restaurant professional.
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