There are numerous reasons you may  want to know the value of your company. In addition to reasons related to a potential sale of the business and allocation of the purchase price to various assets or asset classes, valuation is also important for other purposes such as mergers, business conversions, borrowing, shareholder/member/partner agreements or disputes, estate tax valuation or buyout upon the death of a member, and gifting for estate planning. Many times, appraisals by certified appraisers are necessary or advisable.   

Below are some common valuation methods for small businesses. Valuation professionals often use varied approaches to find a balanced, well-rounded number that more accurately depicts your company’s value. 

1. The Multiple of Earnings Approach

Many valuations are based on a multiple of earnings before taxes, interest, depreciation and amortization (“EBITDA”).  This provides a measure of a company’s operating performance, excluding non-operating expenses and non-cash charges.  

Multipliers vary based on industry, market volatility, business location, risks, and many other factors. Often, the higher the EBITDA, the higher the multiplier will be.

Next, EBITDA will be “normalized,” or adjusted for unusual or non-recurring items. This adjustment provides a more accurate measure of the businesses “normal” operations.

Normalized EBITDA will often be further adjusted to determine the seller’s discretionary earnings (“SDE”), to provide a measure of expected financial value a new owner would gain on an annual basis. These adjustments are sometimes referred to as “add backs” and typically include owner’s compensation, perks and benefits, as well as excess expenses paid to related parties, such as rent if those expenses exceed market value.

Lastly, normalized EBITDA or SDE may be further adjusted, or weighted, so as to give more effect to recent earnings than earnings from two, three or more years ago. This may be referred to as a “weighted average” of earnings over the prior three to five years.

Finally, the valuation professional will determine the appropriate multiplier for your business.  This multiplier will be based on many factors, including the nature of your business, recent transactions in the same and similar industries, and various other market conditions and risk factors.  Often the multiplier is between 3 and 5, however, but could be lower or higher.

2. The Discounted Cash Flow or Capitalization of Earnings Method

The discounted cash flow or capitalization of earnings methods rely heavily on many of the same earnings calculations discussed above; however, rather than applying a multiplier to one year’s earnings, this method projects earnings for a number of years and then discounts that stream of income to its present value.  Instead of a multiplier, the valuation professional must determine a “discount rate” or “capitalization rate” which will reflect a number of different factors such as interest rates, inflation, business risk, etc. 

3. The Adjusted Net Asset Method

Some valuation methods for small businesses focus solely on business assets rather than cash flow, revenue, or earnings. The Adjusted Net Asset Method looks at the monetary value ofyour business’s tangible assets such as real property, furniture, fixtures, and equipment, inventory, accounts receivable, etc., net of loans, financing, payables, and other liabilities. This method is more appropriate for asset heavy businesses as opposed to service businesses and operating companies.

Work With a Business Law Attorney for Personalized Support

Again, there are many reasons you may need or want to value your business.  Typically, a business valuation professional will be advisable or required.At Wilson Ratledge PLLC, our business law attorneys can help you with whatever needs you have that might require valuation, from succession and estate planning, to selling your business.  We can also help you understand the many factors that go into the valuation, and how they affect your needs, plans and goals.a.

Call Wilson Ratledge PLLC today at 919-787-7711 to schedule a consultation with our team. 

In a significant development in the world of non-competes, a federal court has issued a nationwide injunction of the Federal Trade Commission’s (FTC) attempt to implement a nationwide ban on non-compete agreements. The case is Ryan, LLC vs. Federal Trade Commission.

The rule, which was to take effect on September 4, 2024, would have prohibited employers from enforcing non-compete clauses in most cases, affecting an estimated 30 million Americans. However, Judge Ada Brown of the U.S. District Court for the Northern District of Texas ruled that the FTC lacks the statutory authority to enact such a sweeping rule without congressional approval, deeming the rule “arbitrary and capricious.”

This ruling is a major setback for the FTC, which has argued that non-compete agreements restrict workers’ economic mobility and are detrimental to fair competition. Business groups, on the other hand, have contended that these agreements are crucial for protecting business interests, fostering innovation, and ensuring growth. The ruling is part of a broader legal battle involving multiple lawsuits against the FTC’s rule in various states, including Texas (where the nationwide injunction was issued and seems likely to be appealed), Florida (where an injunction was issued but only applied to the plaintiffs in the case), and Pennsylvania (where the court declined to issue an injunction stating the plaintiff had not demonstrated the necessary likelihood of success on its challenge to the ban). 

The implications of this court decision are profound, as it not only halts the immediate implementation of the non-compete ban but also sets the stage for further legal challenges that could potentially nullify the rule entirely. Despite the roll-back of the Chevron doctrine (which for decades gave great deference to agency interpretation) by the Loper Bright decision, FTC is expected to appeal the decision.  The case underscores the ongoing tension between regulatory efforts to protect workers and business interests in the evolving landscape of employment law.

The U.S. Chamber of Commerce President and CEO Suzanne P. Clark stated “This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions. A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage…We remain committed to holding the FTC — and all agencies — accountable to the rule of law, ensuring American workers and businesses can thrive.”

For now, non-competes remain subject to state specific statutes and case law, and their enforceability is typically highly dependent on the particular facts and circumstances of any given case. If your business relies on non-compete agreements or you’re concerned about how this ongoing legal battle might affect your operations, it’s crucial to stay informed and prepared. At Wilson Ratledge, our team of experienced attorneys is here to help you navigate these complex legal changes and ensure your business remains compliant with the latest regulations. Contact us today to discuss how we can protect your business interests and provide tailored legal strategies to help you succeed.