What is your business worth?

Top 10 tips for valuation

business-valuation-shutterstock_471791351Putting a price on a business can be tricky, especially considering the many factors that can influence value. Business owners who are interested in finding out how much their company is worth can take these steps to add and measure value.

  1. Evaluate your options.
    Management buyout, private equity recapitalization, gifting shares to a family member, employee stock ownership plan, strategic buyer, asset sale…depending on the type of exit an owner plans to make, the value of the company is different.
  2. Analyze value drivers.
    Efficiencies realized in a merger, industry position, growth trends, quality and reputation of the business, cash flow and profitability, customer relationships, economies of scale, financial performance, human capital, marketing strategy, strategic vision and technology all make a big impact on value.
  3. Determine the range of value.
    Will the business continue to operate after the sale, or is it being liquidated? What is fair market value versus investor or liquidation value? The difference can be drastic, depending on the type of transaction.
  4. Establish your financial objective. If an owner wants to take the money and run, a strategic buyer might be a good choice. If she wants to remain involved in the business, a recapitalization may work well. If there is a strong desire to maintain the status quo, an ESOP would be ideal.
  5. Get to know your banker.
    Access to debt and equity capital is a key value driver. Think about how to increase yours.
  6. Diversify your customer base.
    It’s tough to sell a company with one or two customers providing the majority of orders. What happens if those customers decide not to buy your product anymore?
  7. Figure out where you stack up. Ask an outside expert to compare your company’s financial performance to others in your field, lay out assets and liabilities and identify trends.
  8. Formalize the game plan.
    Draw up an official account of the strategic vision and enumerate how the company will get there. It gives potential buyers an idea of what to expect in terms of later investment.
  9. Specialize in a few things.
    Diversify the company’s product mix to assure it isn’t heavily impacted by business cycles and it can meet several of a customer’s needs.
  10. Track market reputation.
    Know where the company stands in market position and potential industry headwinds. Have a strong marketing plan in place and solidify the brand.  

Source: Valuation Research Corp., Milwaukee.

business-valuation-shutterstock_471791351Putting a price on a business can be tricky, especially considering the many factors that can influence value. Business owners who are interested in finding out how much their company is worth can take these steps to add and measure value.

  1. Evaluate your options. Management buyout, private equity recapitalization, gifting shares to a family member, employee stock ownership plan, strategic buyer, asset sale…depending on the type of exit an owner plans to make, the value of the company is different.
  2. Analyze value drivers. Efficiencies realized in a merger, industry position, growth trends, quality and reputation of the business, cash flow and profitability, customer relationships, economies of scale, financial performance, human capital, marketing strategy, strategic vision and technology all make a big impact on value.
  3. Determine the range of value. Will the business continue to operate after the sale, or is it being liquidated? What is fair market value versus investor or liquidation value? The difference can be drastic, depending on the type of transaction.
  4. Establish your financial objective. If an owner wants to take the money and run, a strategic buyer might be a good choice. If she wants to remain involved in the business, a recapitalization may work well. If there is a strong desire to maintain the status quo, an ESOP would be ideal.
  5. Get to know your banker. Access to debt and equity capital is a key value driver. Think about how to increase yours.
  6. Diversify your customer base. It’s tough to sell a company with one or two customers providing the majority of orders. What happens if those customers decide not to buy your product anymore?
  7. Figure out where you stack up. Ask an outside expert to compare your company’s financial performance to others in your field, lay out assets and liabilities and identify trends.
  8. Formalize the game plan. Draw up an official account of the strategic vision and enumerate how the company will get there. It gives potential buyers an idea of what to expect in terms of later investment.
  9. Specialize in a few things. Diversify the company’s product mix to assure it isn’t heavily impacted by business cycles and it can meet several of a customer’s needs.
  10. Track market reputation. Know where the company stands in market position and potential industry headwinds. Have a strong marketing plan in place and solidify the brand.  

Source: Valuation Research Corp., Milwaukee.

Comments

  1. Doug Calahan says:

    Great points guys. A couple of follow-ons.
    – Value drivers are very, very important. If your industry gets a multiple of 5x-8x EBITDA, a $1M EBITDA business will sell for $5M – $8M. The difference is usually these value drivers. These take time to put into place.
    – Be careful with ESOPs. We have been recommending clients away from them for the last few years. There are better options available these days.
    – Owner dependency. Whether you are selling to an outside or inside buyer, owners MUST reduce owner dependency. A good test – take a 1 month vacation. Are sales, operations, financials impacted?

    Doug Calahan
    Exit Planning Strategist
    NAVIX Consultants
    http://navixconsultants.com/questions-owners-ask/
    https://www.linkedin.com/in/dougcalahan/