One of the most common questions I’m asked about in my line of work is, “how much is my company worth”?
And the two things clients always seem to focus on and confuse, are goodwill value and blue sky value.
Maybe you’ve heard this jargon used before or maybe it’s completely new territory for you. Either way, let’s dive into what these terms are and why they matter to you.
Our sweet spot in business brokerage is premium mainstreet businesses, or the type of businesses you would find on Main Street, USA, that are owner-operated and usually have anywhere from 5 to 50 employees.
Simply put, when healthy, these businesses tend to sell at a multiple of their earning power.
To determine the earning power of the company, we need to first take a look at historical financials. Once we figure out a company’s financial history, we can create a level playing field where we can compare Company A to Company B and C and break down what the company is worth as a simple dollar amount that we call, Most Probable Selling Price (MPSP).
When analyzing the earnings power of a company, a portion of this earning power cannot be represented by tangible assets; this is known as goodwill value.
Goodwill value is an intangible value the business represents based on its historical earning power.
A key point of note: goodwill value can be proved through data and legally defended.
On the other hand, blue sky value is used to represent intangible value that represents a premium someone will pay for a business that is not based in any defendable analysis.
Many times, strategic business buyers want to buy a company that has synergies that exist within their current company and are willing to pay a premium to acquire the new company -- that premium is the blue sky value.
Take, for example, a landscaping company.
A local landscaping company is looking to acquire another local landscaping company in order to grow their business through acquisition (instead of organic growth).
Part of the blue sky value of this company lies in the landscaping company not having to purchase another set of tools for the new company because it synergistically already has these tools.
These are two important considerations to understand when determining your company’s value.
As you can see, there is a lot more that goes into a company beyond profits and revenues.
Don’t know where to start in valuing your business for a sale? Reach out to us to set up a free strategy call!