Rhode Island’s Small Businesses Can Benefit By Knowing Their Value

With nearly 100,000 “small businesses” in the state of Rhode Island, it is clear that the general welfare of the state’s one million residents is directly tied to the health and value of its private sector enterprises. With tourism being a major force in the area’s economy, restaurants and the food service industry are pivotal components and collectively represent millions of dollars of asset value including the sizable “goodwill” associated with profitable players.
The average small business in Rhode Island generates $558,000 in revenues and $90,860 in discretionary earnings. Based on typical multiples for owner-operated businesses obtained from current market data sources, this “average” business is worth between approximately $183,000 and $1,464,000 as of early 2014. For most entrepreneurs, the value of their going concern represents the single largest asset of their retirement portfolio. Owners should take the time to understand the basics of business valuation in order to optimize their control over the future performance of their business and to engineer a successful “exit strategy.”
There are both strategic and tactical reasons for obtaining a valuation and understanding the basics of the valuation process. Two of the primary strategic reasons include:
1) Tracking Performance
Until you recognize the key factors that drive the value of a small business, it is difficult to rationally and proactively take the steps needed to optimize its value over time. Once you know how to calculate normalized earnings and learn about the specific factors that impact “market value,” you will be in a much improved position with respect to short- and long-term planning, which optimizes value.
2) Evaluating Offers to Purchase
Whether you are buying or selling a small business, relying completely on advice from disinterested parties or even individuals with opposing interests is not a position of negotiating strength. Nobody knows your business like you do and your knowledge alone, if properly expressed, can enhance business value through the identification of normalized earnings and the derivation of proper multiples.
A couple of tactical reasons why this knowledge is highly beneficial include:
1) Possessing Adequate Insurance
Without proper insurance, you could find yourself in a situation of having to pay out of pocket for damages that otherwise would have been covered by your insurance. Key Man insurance will help protect the value of your owner-operated business for the benefit of lenders, investors, or family members.


2) Obtaining Business Loans
Providing a prospective lender with a credible business valuation will provide instant credibility and bolster your chances of obtaining a loan for working capital, new ad campaign, or fixed assets. The more organized and detailed the presentation, the more control the business owner will have when shopping for a loan.
There is much to learn, but a few hours every month can make a material difference in the ongoing value of your business and your ability to grow, and sell for top dollar when the time to sell arrives. There are many other reasons why you should take the time to learn about valuation and obtain a valuation for your company, but those listed earlier alone should justify such efforts.
The average small, privately-owned and owner-operated business will sell for between 1 and 3 times discretionary earnings with factors such as the type of business, size of business, etc., determining the relative placement along this spectrum–or pushing it above this range. Once the earnings reach $250K to $500K, the pertinent multiples will rise. The “size effect” rewards growing companies not only via higher earnings, but also through higher multiples. If you can increase earnings from say $100K to $500K over time, for example, the business value could rise as follows:
$100K times 2.5 equals $250K
$500K times 3.5 equals $1,750K
For Rhode Islanders, knowing the value of your business is a definitive step towards building the future of your business, ensuring you are properly insured and readying yourself for selling or passing on your business.



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