In working with literally thousands of clients, over the past 3 decades, Paul G. Hauf And Associates helps to explain some of the standards used to “value” a business. Businesses can be valued by separating them into four “tiers” based upon the current “cash flow” or net profit that a business generates after all expenses have been paid.
According to Paul G. Hauf And Associates, the “highest tier” is for businesses worth 8 to 10 times their annual, cash flow. For a business to rank in this top tier, the professionals at Paul G. Hauf And Associates must first establish that the business in question has a durable market position with strong and predictable earnings. Additionally, adds Paul G. Hauf And Associates, these earnings must not rely or be dependent upon a strong management team and there must be little if any competition. Naturally, businesses that fit this profile are quite rare.
Paul G. Hauf And Associates sets a “second tier” valuation at 5 to 7 times annual cash flow. Such businesses must have a strong market position and have limited, earnings variability with only moderate, managerial attention being required. Paul G. Hauf And Associates says that a business in this tier must also experience only limited, competitive pressure.
The “third tier”, according to Paul G. Hauf And Associates, is set at 2 to 4 times the annual cash flow for the business in question. A business in this tier has no major, market advantages. It will also have significant competition, few tangible assets, and it will rely heavily on good management skills to survive.
The “lowest tier”, as described by Paul G. Hauf And Associates, includes companies that are only worth their current, annual cash flow. This tier includes small, owner-operated businesses that are focused on providing services. Businesses in this tier, concludes Paul G. Hauf And Associates, will have few employees and the primary service provider is the business owner.