Ever wonder how a buyer of your business arrives at a purchase price? Buyers acquiring a company will usually do some math to figure out what they are willing to pay for the rights to that business future profits.
We have all made similar calculations. For example, you may have decided in the past to invest $1,000 in a bond that offers 5% interest per year. That is, you decided to spend $1,000 today on something that would be worth $1,050 a year later.
Buyers of a business to the same calculations just in the reverse. That is, they determine what percentage of return they want per year (let’s assume 15%). They then learn of your business Past and projected pre-tax profits for a period of most likely 10 years then discount that annual amount by 15% per year. (See the Table below of an example of $100,000 annual Pre-tax profit and buyer looking for 15% return per year for ten years)
As you can see from the below table a buyer would be willing to pay $501,877 for a business earning a pre-tax profit per year of $100,000.
Now determining the value of your business is more than this calculation. It really involves 8 Key Drives such as: Financial Performance, Growth Potential, The Switzerland Structure, The Valuation Teeter-Totter, Teh Hierarchy of Recurring revenue, The Monopoly Control, Customer Satisfaction and Hub / Spoke.
If you want to learn where your business is on these key factors, give us a call at Focal Point Business Coaching of Pennsylvania for a your own Company’s Value Business Report!
| End of Year | Pre-Tax Profit | 15% Discount |
| 1 | $100,000 | $86,957 |
| 2 | $100,000 | $75,614 |
| 3 | $100,000 | $65,752 |
| 4 | $100,000 | $57,175 |
| 5 | $100,000 | $49,718 |
| 6 | $100,000 | $43,233 |
| 7 | $100,000 | $37,594 |
| 8 | $100,000 | $32,690 |
| 9 | $100,000 | $28,426 |
| 10 | $100,000 | $24,718 |
| Present | Value | $501,877 |