How to Calculate the Blue Sky Value of a Business

As a business owner, you may be interested in selling your business for a variety of reasons, such as retirement, a change in industry, or simply because it’s time to move on to new opportunities. Regardless of your reasons for selling, determining the value of your business is a crucial step in the process. One method for valuing your business is through calculating the blue sky value. In this comprehensive guide, we will explore what the blue sky value is, how to calculate it, and how HedgeStone Business Advisors can assist you in the process.

What is Blue Sky Value?

Blue sky value, also known as goodwill value, represents the intangible assets of a business that contribute to its overall value. This value is based on the reputation and customer relationships the business has established over time. These intangible assets are not typically included in a traditional valuation, which only accounts for tangible assets such as inventory, equipment, and real estate.

Blue sky value can be difficult to quantify, as it is based on subjective factors such as brand recognition, customer loyalty, and reputation. However, understanding the blue sky value of your business can provide insight into its overall value and help you make informed decisions about its sale.

How to Calculate Blue Sky Value

Calculating blue sky value is a complex process that involves a variety of factors. While there is no definitive formula for determining blue sky value, there are several methods that business owners and investors use to estimate its worth.

Method 1: Earnings Multiple

One common method for calculating blue sky value is through the use of an earnings multiple. This method involves multiplying the company’s net earnings by a certain factor to estimate its total value. The earnings multiple is typically based on industry averages and can vary depending on a variety of factors such as the company’s size, growth potential, and industry.

To calculate blue sky value using the earnings multiple method, follow these steps:

1. Determine the company’s net earnings for the past three to five years.
2. Determine the industry average earnings multiple based on industry research or consultation with a business broker.
3. Multiply the company’s net earnings by the industry average earnings multiple to determine the estimated blue sky value.

Method 2: Discounted Cash Flow

Another method for calculating blue sky value is through the use of a discounted cash flow analysis. This method involves estimating the future cash flows of the company and discounting them to their present value. This approach takes into account future earnings potential and risk factors associated with the business.

To calculate blue sky value using the discounted cash flow method, follow these steps:

1. Estimate the future cash flows of the business for the next five to ten years.
2. Determine the appropriate discount rate based on the company’s risk profile and industry.
3. Discount the estimated cash flows to their present value using the discount rate.
4. Add the present value of the discounted cash flows to the tangible assets of the business to determine the estimated blue sky value.

Method 3: Rule of Thumb

A third method for calculating blue sky value is through the use of a rule of thumb. This method involves using a multiple of the business’s gross revenue or net income to estimate its overall value. While this method is less precise than the previous two methods, it can provide a rough estimate of the business’s blue sky value.

To calculate blue sky value using the rule of thumb method, follow these steps:

1. Determine the industry average multiple based on gross revenue or net income.
2. Multiply the business’s gross revenue or net income by the industry average multiple to determine the estimated blue sky value.

How HedgeStone Business Advisors Can Help

At HedgeStone Business Advisors, we understand that selling your business can be a daunting task. That’s why our team of trusted experts is dedicated to providing top-notch service and experience to help you sell your business quickly and for top dollar.

Our comprehensive approach at HedgeStone includes a thorough analysis of your business to determine its true value, including blue sky value. Our team of in-house attorneys, accountants, and marketers have a wealth of experience in business sales and will work with you every step of the way to ensure a smooth and successful transaction.

In addition to helping you determine your business’s blue sky value, we can also assist with:

• Marketing your business to potential buyers
• Conducting due diligence to ensure a smooth transaction
• Negotiating the best deal for you and your business
• Providing legal and financial advice throughout the process

At HedgeStone, our mission is to help business owners like you achieve their goals and realize the full potential of their businesses. With over $4 billion in successful business mergers and acquisitions, our track record speaks for itself.

To learn more about how HedgeStone Business Advisors can help you sell your business quickly and for top dollar, contact us today at (561) 593-3711 for a free consultation.

Conclusion

Determining the value of your business is an important step in the process of selling it. While traditional valuation methods may only account for tangible assets, calculating the blue sky value of your business can provide insight into its overall worth. By using methods such as earnings multiples, discounted cash flow, and the rule of thumb, you can estimate the blue sky value of your business.

However, valuing a business can be a complex process, and working with experienced professionals like those at HedgeStone Business Advisors can help ensure a successful and profitable transaction. Our team of dedicated professionals has the expertise to help you determine the true value of your business, market it to potential buyers, and negotiate the best deal for you. Contact us today to learn more about how we can help you sell your business quickly and for top dollar.