Yeah, yeah. Hi robert Hertz from Freedom Factory here. And one of the questions that we get most often is what is my business worth. And if you like me, most entrepreneurs are so interested in growing their business that you know what it's worth, doesn't really come up that often and you know I always focus on growing sales and I figure if I grow sales, you know and I run it efficiently, the business is going to get better and it's going to be worth more and in general that's right. But it doesn't answer the question of what it's worth and most entrepreneurs say, okay where do I begin? And so when I think of where do I begin? I always think of earnings. A lot of people talk about the Byetta which is for taxes and that can be adjusted into cellars, discretionary cash flow. You figure out how much, you know your business is is worth based upon how much it turns and it depends there's a lot of factors, you know what industry area and how long has it been around? Do you have a customer concentration issue? What that means is do you get 80% of your sales from Walmart or do you get no more than 20% from anyone customer.
And there's a lot of intangibles that go into it. But if you have a a smaller business, let's call it a million and earnings Um in general it's worth roughly 3-5 times earnings. Now that is super rough and it gives you just kind of a thumbnail that you can use and of course we can answer it in more detail when we look at it. But what that means is if, let's say you have a customer concentration issue, let's say you have, you know what whatever it may be, you have some, you know, you have some competitors that are taking business away from me aggressively, you're probably going to be on the bottom end of that now if you have some intellectual property that's defensible or if you have, if you've been around for an awful long time or if you have some sustainable competitive advantage, you know, the way I like to think of it is how big is the moat around the business or how big is the moat protecting you, then you're going to be on the upper side of that? So there's always a range and the intangibles really take you up and down that range. Now.
A big fear that a lot of entrepreneurs have is what if I undervalue my business, you know, when I go to sell it and this is my largest asset for a lot of people, they say the home is the largest purchase you're going to make. Now, if you're an entrepreneur like me, that's not exactly true. It's your business and buying your business and selling your business and you're trying to think specifically, hey, how do I not leave money on the table and conversely you don't want to over price it and get people not interested. So, you know, getting to a really good market value is very important. It's essentially how do you find, you know, how do you put the right team together and make sure that you're pricing it according to market conditions? You know, there's a lot of intangibles that happened. You know, for example, let's say, let's see the tax environments going to change. Maybe we're going to have a new president this year, maybe we're going to maybe have some tax reform going through that's going to affect long term capital gains. Well, that might make you want to close before the end of the year. And so sometimes when we have those artificial either floors or ceilings, they really affect our market timing.
So we want to stay pretty focused on that. But in general to me, there's appraisers and appraisers are really good for, for state sales, you know, for things where nobody is running it. But the problem with appraised value, especially in small business Is nobody's willing to write a check for that. So if an appraiser says your business that makes $1 million five million and no one's willing to write a check for that, it doesn't do you a lot of good. So for me, I buy and sell businesses full time, it's all I do. Um, I would trust a full time business broker that. All they do is focus on comparable sales in the last six months with businesses similar to yours. And I would really focus on market data because almost nowhere else is market pricing more important than small business. And the importance of a broker is pretty significant here because you know, let's say you're selling your house, let's say you have the best broker in your area as opposed to an average broker. Well he might be able to get you five or 10% more and the reality is the appraiser is going to come in and they're going to give you an appraisal value and you're not going to be able to sell it for more.
So in some ways, real estate is more of a commodity, but businesses, you know, I mean for example, you can change from even at a seller's discretionary cash flow if you have a range like we used before from 3 to 5 times earnings. You know, if you can get a broker that gets you away from three and gets you towards five and your business makes a million dollars, you just made a million and a half more and you know, with the effective 23% tax rate. That's awesome. That's $1 million dollars more in your pocket. Or for example, uh you know, sometimes I worked with businesses that are in the wrong industry classification and maybe they started off there, but maybe they've evolved as your business has grown over the last five or 10 years to a totally different industry classification. So it's taking it to market, putting a story together, maximizing the sale of your business. Those are the things that are really important when you think about selling it. I hope this is helpful for getting what it's worth. If you want to call us over at Freedom Factory or if we can give you any help whatsoever, we love to do it. So please hit like and subscribe.
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