“What is the value of my business?”
What is my business worth? It’s an important question, and one that most business owners don’t contemplate over the course of their careers. Unfortunately, there is no definitive answer you can glean from the internet or, frankly, from any valuation professional.
Because a privately held business is only worth what someone is willing to pay for it.
Yes, that seems like a total non-answer coming from a consultant, and you must be thinking, there has to be something more concrete than that.
Well, non-answer aside, there are techniques that can help resolve that big question. Using what’s called empirical valuation methodologies, we can generate a range of potential Enterprise Value.
Comparable Public Companies
Unlike the private market, the public market is valued in real-time with stock prices changing every fraction of a second. In an efficient market, it’s relatively easy to understand value.
One method you can employ is to identify public companies that appear comparable to your business. See how they are being valued and compare those to your company metrics.
Pros: Easy to obtain information and gives up-to-date views on valuation.
Cons: These are large, and sometimes international, are highly liquid.
Comparable Precedent Transactions
Identify comparable companies that have been sold where public information is available. This allows you to see how others have valued companies in your industry, maybe even your direct competitors.
Pros: Provides a more relevant view on valuations for majority sale transactions.
Cons: The valuations are at a particular time and may not reflect the current industry or market environment. Also, it’s often difficult to find detailed information on private transactions.
Discounted Cash Flow
This methodology looks at the forecasted future potential cash generation for the business (usually over a 5-year time frame) and discounts those cash flows back to today based on an assumed discount rate.
Pros: If strong growth is forecasted this may result in a higher valuation.
Cons: The future is always uncertain.
Leveraged Buyout Analysis
There’s a large industry of thousands of financial investors that purchase majority stakes in privately-held businesses using third party leverage (bank debt) and equity capital. These investors are trying to achieve certain hurdles of return whether it is an IRR (internal rate of return) % or cash on cash return.
Pros: It’s a predictable methodology used by a large class of potential investors.
Cons: Again, the future is always uncertain.
“What else do I need to consider when determining the value of my business?”
The types of quantitative analyses above will yield some insight into a range of Enterprise Value for a business, but there are several other factors that are more important:
Is your industry in or out of favor?
- We believe the number one factor that influences the value of a privately held business is the industry that it is in.
- Many industries are cyclical – is yours in the trough, on the upward slope, or at the peak?
- Is outside capital being invested in your industry now?
What is your management team like?
- Do you have a management team that is capable of growing the business aggressively, to double or triple the size it’s currently at?
- If the business owner is the CEO, has a successor been identified and groomed to take over if the owner is looking to exit their role?
Is the business performing well?
- Has there been sales growth both from market share gains as well as price increases?
- Are the profitability margins, defined as EBITDA, exceptionally high as compared to the industry?
Is there predictability in the business model?
- This is defined as recurring revenue, contract-based relationships, or backlog that has been steadily increasing.
Are there long- term customer relationships?
- Does your business have a diverse base of customers?
Do you have Reviewed or Audited financial statements?
- Are the statements in accordance with GAAP?
- Are there significant private company or non-recurring expenses that need to be removed from the financial presentation?
The list of factors goes on and on….
Overwhelmed? That’s where we can help.
“What’s the role of an M&A Advisor in determining the value of my business?”
As strategic M&A advisors, we help by:
- Studying and understanding the fundamentals of the business, its strategy, culture, and how it’s positioned within the industry so that we advocate with passion.
- We identify the buyers or investors that will value these attributes and effectively “create a market” by soliciting written offers to acquire or invest in your business on your behalf.
- We create competitive anxiety and a fear of loss amongst potential buyers or investors.
- This process will yield a range of values and allow the owner to focus on the highest or most interesting offers.
The private transaction market is highly inefficient, and perceived value in privately-held businesses can vary widely.
In fact, our experience shows that valuations can range over 100% from a low offer to a high offer and only through a strategic, competitive process will fair market value be ascertained.
If you take nothing else from this guide, know that we’re on your side, we’re experts, and we can help educate and navigate you through these unfamiliar waters.