WHAT IS YOUR COMPANY'S VALUATION?
Many Entrepreneurs have an unrealistic idea of how much their business value.
That’s not surprising, since research shows that people invariably attach a higher value to things, they own than to things that aren’t theirs, according to the “endowment effect” explained in the Harvard Business review article “Why Buyers and Sellers Inherently Disagree on What Things Are Worth”
The first step in managing or preparing for potential estate planning, recapitalization, full or partial sale of your business is to recognize your own personal bias in valuation as the owner or seller and understand that an investor, buyer, or independent third party is likely to value your business differently.
Company Valuation.
Business valuation is therefore a key issue for entrepreneurs and setting a value for a business isn’t easy, but the value or sale price you produce along with the value drivers of your business will be an important focal point of your company's ongoing growth and eventual exit plan. This means you may have a different value in mind than your family successors, potential buyers, investors, or tax assessors. The difference in “valuation” can cause conflict and may affect your business ongoing growth and personal retirement plans if not understood by yourself. Particularly, if you are intent on giving the business to a family member, you will need an objective valuation to ease family disputes, plan your estate and minimize your tax treatment.
Business valuation is used to estimate the economic value of an owner's interest in a business by various parties when trying to determine the price they are willing to pay or receive as consideration to invest or take part in a full or partial sale of a business. Various business valuation methodologies can be used to distribute purchase price among business assets or in estimating the value of a partners' ownership interest when it comes to selling, buying, acquiring, merging, or structuring a joint-venture transaction.
Valuation Methodologies.
The most common method used to determine a fair sale price for a business by an investor is calculating a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), which is a measure of a business’s ability to generate operating earnings. The future EBITDA is what's available to the future owners to recover their investment or purchase price. The multiples vary by industry, size of business, market conditions, goodwill, intellectual property, location, management team, customers, and other qualitative elements. Many variables influence what multiple a buyer can justify. After arriving at the EBITDA‑based figure, calculating the value of the business’s tangible and intangible assets, what comparable businesses have sold for and if the various valuation approaches yield different outcomes, an expert will need to investigate what caused the differences and may then adjust the EBITDA multiple. An expert's judgement, experience, market-based information, and estimates are all involved.
Impact on Your Net Worth
Because of the complexity and high stakes (a business may represent as much as 80% of a business owners net worth), it is always smart to hire experienced professionals to help you understand the value, set a price, determine whether a buyer’s offer is reasonable and recommend you how the various valuation options change your tax liability and how to minimize tax and other personal liabilities in a full or partial sale. Experts on your team allow you to furthermore leverage their collective (legal, financial, tax and deal-doing) experience having advised previous sellers or buyers of business, access to industry data, accepted financial formulas and propriety resources to examine your business to arrive at a value range based on current competitive conditions and your company's future performance.
Understand the Business Strengths and Addressing its Weaknesses.
The valuation process itself may yield additional benefits when through the assessment process weaknesses in your organization are uncovered by your advisors. Allowing you to decide, define, address, and proactively plan the timing of an eventual transaction after addressing and fixing weaknesses to maximize the company's current growth and eventual transaction price.
Could your Business be more than one Business?
Your business may also be more valuable in pieces. For example, a real estate buyer may find your real estate holdings more attractive as an asset than the operating business that occupies the real-estate. While a business buyer may find your real estate holdings distracting as the real-estate's ownership is not necessary to its ongoing business purposes.
Creating a Premium Valuation for your Business.
Finally, keep in mind that the value for your business can be substantial increased through a professional M&A auction process. For example, a single buyer you directly engage with often under their terms and timing versus competing buyers brought into a professional M&A process led by your M&A advisors will cause higher valuations on more than financial formulas due to a competitive auction process.
Next steps?
REQUEST OUR BUSINESS VALUATION GUIDE.
This free e-book we will explore:
- Preparing for a valuation.
- Valuation methodologies.
- Valuing intangible assets.
- Valuation mistakes to avoid.
- Price and or value.