Valuing an Essential Oil Distributor Business
This past week, I had the opportunity to value an essential oil distributor business. After discussing the current state of the company as well as the purpose of the business, we discussed what a business valuation entails. Below we discuss some of the points of valuing an essential oil distributor business.
Business Valuation for an Essential Oil Distributor
A business valuation determines the market value of a business. A business valuation for an essential oil distributor business model relies on precedent transactions as well as cash flow analysis.
1. Precedent transactions analysis compares your business against similar businesses that have been recently sold or acquired in the same industry.
2. Cash Flow Analysis relies on the earnings potential of a business. Two primary cash flow analyses are commonly used. They are the following:
- Capitalization of Earnings
- This analysis looks at a single period of earnings and applies a capitalization rate. A business appraiser uses a similar analysis to determine the value of the real estate.
- Capitalization of Seller’s Discretionary Earnings (SDE)
- SDE is a cash-flow-based measure of business earnings in an owner-operated business. It comprises the profit before tax and interest of a business before the owner’s benefits, non-cash expenses, and other non-related business incomes and expenses. A business analyst then applies a capitalization rate to the cash flow to derive a market value.
Overall, no matter what business you are in, understanding the value of your business today can assist you in making more effective and efficient decisions. In the case of an essential oil distributor business, it can assist in many ways. Peak Business Valuation is happy to answer any questions you may have about valuing a business. Reach out by scheduling a free consultation.
Case Study:
As mentioned previously, Peak Business Valuation provided a business valuation for the express purpose of buying out a partner. The challenge of the valuation; however, was that the business did not have an operating agreement that defined valuation in the event of a buyout. The parties were at an impasse and could not reach an agreement as to the fair market value of a 50.0% interest.
Peak Business Valuation was approached based on a referral to perform a business valuation. The following describes the purposes of the business valuation:
- Help the shareholders better understand the fair market value of the company.
- Present the valuation conclusion to the remaining shareholders to ensure a thorough understanding of its conclusion as well as justification of the determined opinion of value.
Conclusion of Value:
In this particular case, we presented the business valuation to one of the partners. The valuation has been presented to the other partner and mediation is taking place to determine the buyout value.
Valuator’s Summary of Engagement:
Shareholder buyouts (as well as shareholders buying in) occur frequently in closely held companies. Departing, remaining, or incoming shareholders must believe the transaction is fair between the parties.
Peak Business Valuation performs many valuations relative to Buy/Sell Agreements. In the event a Buy/Sell Agreement does not exist, a well-documented professional valuation is critical. This enables the Shareholders to reach an amicable negotiated agreement.
A third-party valuation serves as a great foundation to negotiate and facilitate an agreement that appeases all parties involved in a shareholder transaction. With a professional business valuation, shareholders are more likely to negotiate successful transactions. They are also able to avoid costly, distracting, and time-consuming disputes.
We at Peak Business Valuation work with a handful of MLM distributors. We welcome any questions you may have. Feel free to reach out by scheduling a free consultation.
See also How to Value an Essential Oil Business.
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