business finance

MPSP: Calculating How Much a Business is Worth

Turnovers aren’t new in the field of business, but the truth is that each business has a different method of being sold to a new owner. With so many industries cropping up, merging, and falling off in the economy, business brokers must have a fair idea of what exactly a business is worth and how to use that knowledge to sell.

Keep in mind that this isn’t purely just a business broker opportunity. Many other industries can always do with an accurate representation of how much their business is worth. Not only does this allow you to have a much better idea of the outlook of the company going forward, but it also gives you more leeway into pricing its services.

Entering the MPSP

The most commonly accepted method for determining how much a business is worth is the Most Probable Selling Price value, a statistic that’s determined by many factors depending on the niche that the company occupies. While most business brokers have their own way of getting this value, they all follow some general guidelines.

Usually, the MPSP is a mixture of many things about the business, including financial records, inventory, stock prices, contracts, outsourced companies, and tax returns. However, it’s important to remember that these are not the only factors that will affect a business’s value. This also depends on the market that they are being sold in.

Earning Capacity

business chart with calculator, pen and eyeglasses

A business’s earning capacity must be established in order for it to be sold. Essentially, you need to answer the question “how much profit can this business give to its owner in this amount of time?” The best way to do this is by doing financial recasting.

This tricky accounting task is best left to your accounting department, but financial recasting is simply a method to isolate expenses that aren’t recurring or related to the business. Add those to your bottom line and use that to get the value out of your business.

Why Use This Method?

Businesses can often incur expenses that aren’t critical to their operations. These include free meals, sundries, or perhaps a loss incurred on a promo that didn’t work out. While these may still technically count as expenses, they shouldn’t be listed as such when doing recasting.

This results in a number that’s called a business’s SDI or Seller’s Discretionary Income. Aside from including non-related business expenses or income, this can also include one-time expenses, such as branding and logo redesigns, pre-tax profits, and adjusted expenses (though, this one only applies when a smaller company is bought by a bigger one).

That’s only one section of what makes an MPSP what it is, though. Most brokers will use a database of earnings and market forecasts to accurately determine both the final value of the MPSP and the projected return on investment on the part of the buyer. What was discussed above was merely the basics. If you need more information, it’s best to consult a reliable and experienced broker.