How to determine the value of a business

By Generational Group

07/16/2016

When a business owner decides to sell their company they face a daunting task. Often, when the decision to sell has been made, the natural instinct will be to call a local accountant, attorney or broker. However, the chances are that these professionals are not experts on the matter, or in the case of a broker have a localized view of the market and a restricted network of private buyers. By falling into the trap of not finding an optimal buyer, 75% of business owners sell their company for less than it is worth.

One of the most crucial steps to achieving a successful sale comes in the form of the valuation. Valuing a business accurately is a skill that requires a combination of industry knowledge, experience and proven methodologies. If you are not armed with an accurate figure of your business’s worth when you take it to market then you risk taking a less-than-optimal offer from a buyer. There are a number of methods for valuing a business, these include:

• Public market comparable analysis
• Identifying precedent M&A transactions
• Discounted cash flow analysis
• Book- or asset-based valuation approaches
• Applying multiples to revenue, EBITDA (earnings before interest, taxes, depreciation, and amortization), or net income

Deciding which methods to use for valuing your business is a skill that only experienced valuation team can provide, and will often require a combination of all these methods, plus a look beyond these formulas to achieve a fair and accurate figure. A typical business valuation undertaken by Generational Group will involve taking a thorough look at a number of items, including:

• What the company does and how
• The company’s customer – who they are, why they buy and how strong they are.
• Analyzing and recasting the company’s financials
• Projections of financial statements for the current year and five-year pro forma period based on previous results, management strategies and the operating environment.

The ultimate output of this will come in the form of Generational Group’s comprehensive Offering Memorandum which will be sent to potential buyers once they have signed a confidentiality agreement. This document will contain your entire evaluation plus a description of its intangible assets, without any mention to the value of the company.

Whilst the value of your company’s intangible assets will vary from buyer to buyer, determining them is a crucial part of the process. However, often a business owner will be so close to their company that they take the intangible assets that make them unique for granted. For example, you may have an established base of trusted long-term employees, a great internet presence or a number of contracts with existing clients. If you are attempting to market your company alone, it is important to meet with a trusted advisor who can help you establish these items.

Thoroughly documenting your company is perhaps the most critical part of the M&A process. If every aspect of your business is not properly documented then the chances are that the offers you receive will not match your expectations. The comprehensive service that Generational Group can provide as an established M&A advisory firm is invaluable.

To find out more about how Generational Group (part of the Generational Group) determine the value of a business you can attend one of our complimentary educational workshops. Find your nearest workshop today.

FAQs:

What are the main methods used to value a business?

Owners generally encounter 3 broad approaches: asset-based methods, market or comparable-company methods, and income-based methods such as discounted cash flow. Many M&A advisors also apply an EBITDA multiple drawn from comparable transactions.

How to value a business for sale: where should an owner start?

The process usually begins with clean, recast financials and a clear view of the earnings and assets a buyer would actually pay for. From there, an advisor weighs industry multiples, growth, and risk to produce an estimated range, since the market ultimately determines the final figure.

What is the difference between a valuation and the price a buyer pays?

A valuation is an informed estimate of what a business may be worth, while the price is what a specific buyer agrees to pay after negotiation. The two can differ because each buyer weighs a company’s strengths differently.

What financial adjustments affect the value of a business?

Recasting, or normalizing the financials, often has a large effect. Removing one-time costs, owner perks, and above-market compensation can reveal earning power that standard statements may obscure.

Do intangible assets factor into what a business is worth?

Yes. Brand reputation, customer relationships, intellectual property, experienced employees, and proprietary processes can all carry meaningful value, and their worth often varies from one buyer to the next.

How much does industry affect valuation?

Industry plays a major role, since buyers apply different multiples and expectations across sectors. Timing and demand within an industry can also shift how buyers view a company in a given year.

Can I value my own business, or do I need professional help?

Owners can build a rough estimate on their own, but a professional valuation is designed to reflect how buyers actually assess risk and opportunity. This often surfaces value that an internal estimate may overlook.

How can Generational Group help me determine what my business is worth?

Generational Group provides business valuation services that recast financials and benchmark a company against relevant market data. The aim is to give owners a realistic, well-supported range before any decision to go to market.