MARKET INSIGHTS | CURRENT EVENTS
What is the Value of my Business?
PUBLISHED December 18, 2020 BY ALAN STEIN
A business is typically valued on Free Cash Flow (includes adjustments for taxes, capital expenses, owner’s salary, depreciation, etc.), business risk (concentration of the customer base, political considerations, commodity prices and trends, etc.), historical and trending revenue and income, as well as other relevant considerations, such as staffing, the management team, profit margins, business strategies, the quality and reliability of the financial reports, etc.
Although most sellers would like their business valuation calculation to be based upon some simple predetermined multiple of EBIDTA or Sellers Discretionary Earnings (SDE), this approach can only be used as a range reference, due to the many unique factors associated with the particular business being acquired. In addition, valuation is usually not based upon projected growth or future earnings unless the seller and buyer negotiate an incentive for growth that can be achieved during the period that the existing management stays with the company.
Positive trending profit margins, above a certain threshold, and a minimum projected growth rate are two elements that many buyers require as a component to help establish their acquisition interest. When buyers try to sell their business after revenue and income have peaked, they often over value their business and have difficulty finding a willing buyer.
Asset light businesses typically have a higher valuation than similar businesses with the same revenue but a higher CAPEX requirement. Equipment, machinery and related assets wear out and require repair and/or replacement which ultimately reduces cash flow and the corresponding business valuation.
Every company has different variables and risks that will impact valuation. A strategic buyer might place a higher valuation on a particular business, based upon cost reductions, benefits and/or services that can be obtained from their existing portfolio holdings. On the other hand, a non-strategic buyer may assign a lower valuation based upon a higher cost to operate the business, the number, type and cost of assets in need of repair or replacement, the cost of management services, etc.
In all acquisition and sales transactions, the buyer and seller should each employ an experienced attorney and CPA to understand the various selling strategies and tax implications that can work to their best advantage.
To get the best value for your business, by finding the right buyer for your business, sellers should be prepared to provide a comprehensive detailed description of the business, including but not limited to, the history of the business, how the business makes money, significant achievements, milestones, proprietary advantages, future opportunities, bios of key people, three years of historical financial information, and financial projections for future growth. If this information aligns with the interest and financial parameters of the buyer, they will generate detailed follow up questions and will want to obtain a Quality of Earnings Report and/or audited financials.
First Boca Associates (FBA) can leverage its deep industry expertise and extensive industry relationships to facilitate a confidential and focused campaign, to a targeted selective audience, in order to introduce highly qualified and synergistic buyers for your business.
Simply complete the FBA contact form on our website here, and we will contact you to learn about your company and objectives with a free introductory call.