You are in the market to buy or start a landscaping business and you want to know what the business is worth? Perhaps you already own a landscaping company and you want to sell it. Either way, you need to know how much the business is worth.
To determine how much a landscaping business is worth, you need to do a business valuation and this takes into account factors such as cash flow, revenue, assets, shares, and liabilities.
It is not as hard as it sounds, but it is not a quick and easy process either. Let’s walk through this process together. Keep reading to find out how to determine the value of the landscaping business! Get a better understanding of the process so that you can make a sound decision.
Business Valuation
A business valuation is a procedure that determines the fair market value of a business. Several principal factors go into the valuation of a landscaping business, whether you are the buyer or the seller. A business should be appraised anytime there is an important decision to make involving the business’s value. Using an incorrect value can lead to a failed sale, buy-out, acquisition, dispute resolution, tax filing, etc.
Once the required information has been received, most full-scope business valuations take about 3-4 weeks. In reality, the time frame depends on the scope of work, the complexity of the business, the accuracy of the information, as well as other factors.
Limited scope calculation analysis may be adequate when you only need an estimate of value for internal use. A full analysis and summary, in other words, a summary report generally is appropriate for shareholder disputes and IRS purposes when needed. A summary report is typically acceptable for third-party investors.
Less than 2% of CPAs have the expertise and credentials to value businesses. However, generally, CCPAsn’t appraise their own clients’ businesses, regardless if qualified to do so, because they have an inherent conflict of interest. More often, CPAs supply the quality financial reporting needed to do the valuation.
A few of the factors are cash flow, revenue equipment, share price, intangible assets, company liabilities, and trade activities.
Cash Flow
Cash flow is the amount of money that is outgoing; money spent on day-to-day operations. Cash flow plays a significant role in the survival of a business. Without it, there is no way to calculate if a business is making a profit or if it’s not. Knowing a business’s cash flow helps to determine future cash flow needs.
Calculating cash flow can be done short-term: taking the monthly starting amount of capital in the budget, inflow, and outflow of cash, and the ending balance or long-term: factors anticipated cash flow and expenses. The long-term can be tricky compared to the short-term to calculate, due to the unknown variables that may arise.
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Revenue
Revenue is the total streams of money brought in by a business’s operations that are measured over a set period. However, generally speaking, the first step of the process is to combine the entity’s total earnings, such as its profits. Next, factors such as interest and equity must be added to the company’s earnings. Together, these figures will produce the company’s approximate revenue, from which various expenses and tax liabilities may then be deducted.
Revenue streams are the various sources from which a business earns money from the sale of goods or services and is a key performance indicator for all businesses. In terms of revenue, analyzing a company’s performance is always one of the crucial tasks. For this reason, analysts must be able to recognize the different revenue streams from which the company generates cash and interpret the revenue figures on financial statements. Some examples of revenue streams include sales, rentals, interest, etc.. Each of these revenue streams is tracked and evaluated individually by a business’s accountant.
A stream of revenues that are generated over a certain period is applied to multipliers that depend on the industry and economy. For instance, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue.
The ability to accurately calculate and analyze revenue is essential to the financial success of any business.
A business’s revenue is its gross income before subtracting any expenses. Profits and total earnings define revenue—it is the financial gain through sales and/or services rendered.
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Assets
Assets come in multiple forms, including tangible and intangible. Tangible assets include all equipment and inventory, whether office or field. Intangible assets, assets you cannot see, include brand, any legal rights, intellectual properties, customer base, goodwill, and more.
You can calculate the value of tangible assets by adding up the value of everything the business owns, minus any debt or liabilities.
Without physical properties, it’s hard to measure the value of intangible assets. However, intangible assets add a significant value to a business, including a competitive advantage, and should only be calculated as long-term assets and valued according to their purchase price.
To calculate the value of a business’s assets, you will add the value of tangible and intangible assets. For instance, the value of tangible assets is $500,000 and the value of intangible assets is $175,000. By adding the tangible assets valued at $500,000 and the intangible assets valued at $175,000, you get a total value of all assets of $675,00.
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Shares
Multiply a business’s current share price by the total number of shares. For instance, the price of a business is traded at $81.67 and their share total is 8.266 billion. Multiplying the trade share of $81.67 by the outstanding shares 8.266 billion will calculate the business’s value at $675.08 billion
Liabilities
Every business has liabilities. Liabilities are debts and or other obligations in which your business owes money. Liabilities include everything the business owes: loans, barter, etc., currently and in the future. The liabilities include loans, barters, legal debt, and or any other financial obligations that arise during business operations. New equipment, expansions, and day-to-day operations are the most common liabilities in any business.
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Current Liabilities
These are liabilities that are to be paid back within a year: loans, credit lines, salaries, and any accounts payable.
Some examples of current liabilities include, but are not limited to: accounts payable, bills payable, accrued expenses, interest payable, income taxes payable, short-term business loans, and bank account overdrafts.
Businesses generally will monitor their current/short-term liabilities closely to ensure they have enough funding or the ability to cover immediate and short-term obligations for any outstanding debt, as well as to judge how their business is doing financially.
Long-term Liabilities
These are liabilities that take more than a year to pay back, including mortgages and bonds.
Non-current liabilities or long-term liabilities: these are due after more than a year. For example, most businesses take on a long-term liability to obtain immediate funding to purchase/secure an office building, or computer equipment or to invest in new capital projects.
Long-term liabilities are crucial for determining a business’s long-term solvency or ability to meet long-term financial obligations. If a business were unable to pay the long-term liabilities when due, they would fall subject to bankruptcy.
Contingent Liabilities
Some liabilities are dependent on the outcome of future events, such as lawsuits, etc.
Contingent liabilities or potential risk: these only affect a company depending on the outcome of specific future events. For example, a company that is facing a lawsuit, they are responsible for any liabilities if the lawsuit is successful, but not if unsuccessful.
Contingent liabilities are only recorded for accounting purposes if probable and if the amount can be reasonably calculated.
To simplify business liabilities, a business to look at how they pay for things for their business. They either pay with cash or check from a bank account or use credit cards or loans. Loans and credit cards always create a liability and can be settled over time through the transfer of money, services, and or goods.
By listing and adding together all liabilities: liabilities + equity = assets, a business can calculate its total liabilities. To not be in the red, a business’s total liabilities, including your total equity must equal the number of total assets.
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Frequently Asked Questions
What is the premise of value?
Selecting the right premise of value is important, similar to the standard of value. There are two basic premises: a) value as a going concern and b) value in liquidation. A premise is normally chosen based on the highest and best use of the business, given the circumstances and market conditions on the valuation date.
Is there a difference between a business valuation and a business appraisal?
No. These terms are interchangeable.
Do business valuation credentials matter?
Ultimately, value is an opinion, not a fact. The credibility and skill of the individual offering the opinion determine whether or not a valuation holds up to the scrutiny of a partner, investor, lender, or judge.
To learn more on how you can start your own landscaping business, check out my startup documents here.
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Meet Shawn Chun: Entrepreneur and Landscape Business Fan.
I’m a happy individual who happens to be an entrepreneur. I have owned several types of businesses in my life from a coffee shop to an import and export business to an online review business plus a few more and now I create online resources for those interested in starting new ventures. It’s demanding work but I love it. I do it for those passionate about their business and their goals. That’s why when I meet a landscape business owner at a job site, driving down the road or anywhere else I see myself. I know how hard the struggle is to retain clients, find good employees and keep the business growing all while trying to stay competitive.
That’s why I created Landscaping Business Boss: I want to help landscape business owners like you build a thriving business that brings you endless joy and supports your ideal lifestyle.