After 24 years in business – a fine accomplishment by the way – you should know what business factors others will use to measure your company’s worth.   Your business is as much a financial asset as the money in your savings account.  Knowing your company’s current market value can help you plan for retirement or give you options if you ever want a career change.

To gain a better appreciation of how businesses are valued, let’s first look at who buys businesses.  Afterall, it is the buyers that give tangible meaning to valuation discussions.

In general, there are two types of business buyers:  financial buyers and strategic buyers.  A financial buyer, like a private individual investor or buy-out fund, only buys businesses for a healthy return on investment.  This buyer is a number cruncher and evaluates ways to improve a company’s revenue and earnings so that one day the business can be flipped to yet another buyer for a profit or go public.

Financial buyers also look to the overall size of a market to confirm there is room for business growth.  If for example, you have already secured 70% or higher of the independent film marketing business in the US, this achievement may dampen enthusiasm because of limited perceived upside.

Strategic or corporate buyers buy businesses not only for profits but for other operating benefits as well.  These buyers acquire companies that will boost their overall market share, technical know-how or production capacity.  Sometimes money-losing companies can receive a premium valuation if they have a desirable location, patents or contracts that can be leveraged in new revenue-generating ways. 

In your industry it is common for well-established, niche-oriented public relations firms to be acquired by larger advertising agencies.  Why?  Simply because the advertising agency would like to reach out to the PR firm’s client base to sell other advertising, market research or consulting services. Some corporate types call this “synergy.”

To value your business, professional business appraisers would largely rely upon recent acquisition activity for guidance.  To the extent this information is available from public or private sources, the appraiser would look at the price paid recently for “comparable” companies.  Often this number would be presented as a multiple of the acquired company’s revenues or operating income (cash flow before interest and taxes).  If for example, a company with $1 million in annual revenues was bought for $2 million, then the acquirer paid 2 times revenues.  This 2 times multiple would then be applied to your company’s revenues to estimate your company’s value.

There are several other methods for valuing privately-held service businesses.  But as you suspect, the value of your business today is closely tied to your ongoing ability to bring in business.  Professional business appraisers would cite this as a potential risk if you became disabled or no longer worked for the company.