What’s My Company Worth?

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I have been participating in a discussion with other LinkedIn members about the valuation of new entities over the past week or so.  Clearly, there is no hard and fast rule to this process- and, that’s mostly because we have no hard and fast ability to determine who is going to succeed in the long term. It’s a little easier to evaluate a going business, as long as we don’t try to discern how much the future will impact the value of the company right now.

In the 80’s and 90’s, business valuations were (relatively) high.  Today, we have lowered expectations and significant nervousness about our future (why no one seems to worry about the present scares me more ).  We still need to determine the valuation of our companies – even if we don’t plan to go public.  We need to determine the value of investing in new equipment, obtaining a bank loan, or hiring new people.

But, those are not the only reasons.  What happens if a partner dies or desires (forced?) to leave the business invoking a buy-sell clause.  Or, even more common today, the divorce of one the key principals of the business requires the valuation to be determined.  Other reasons include estate planning or the desire or need to spin off a small (or large) portion of the business, due to the changing vision of the firm’s future. As you can see, the need for business valuation can be outside or inside driven and some have significant legal consequences.

Since 2000, the valuation process has shifted somewhat.  Around the start of the 21st century, one could assume that the price to EBIDTA (Earnings Before Interest, Depreciation, Taxes, and Amortization) ranged from 3.5 to 9.5.  (9.5 for revenue > $ 1 billion, 6.5 for > $100 million, 5 for > $ 20 million, and 3.5 for > $ 500K.)   Part of this valuation change has been a shift in circumstances doesn’t really affect the smaller enterprises: the valuations were determined from the acquisitions of companies- and those acquisitions were made for combinations of cash and stock.  As the cash portion for the acquisition rose, the multiples dropped.   This type of devaluation- when cash instead of “cheap stock” is used- can be expected to continue.

If you are planning to sell your business, then you should consider paying a professional to provide you with the valuation- either as ammunition to bargain for the best price or assurance that your price is proper.  Seek out the services of an ASA (Accredited Senior Appraiser), CBA (Certified Business Appraiser); the choice of a ABV (Accredited in Business Valuation for CPA’s) or CVA (Certified Valuation Analyst) is a lower-value choice.  A valuation runs from $ 4000 to $10000 (or more)- but never accept one that would based upon the company’s value.

Keep in mind that the valuation you obtain from these professionals is a function of the depth of your management team, the compensation package (which should be in line with industry peers), the diversity of customers (more than two or three upon which the company may rely), and the diversity of your suppliers (one key supplier’s failure can shut you down).  In addition, to command a premium valuation multiple, your firm needs excellent cash flow.  The goal of the acquiring entity is the  minimization of risk.  The acquirer is buying the potential to make money in the future- and the more they can make, the more they will pay.

No matter how which metric (or metrics) upon which you base the valuation, the multiple (or augmentation)  that your company may deserve compared to your  peers is always up for discussion.  The tools required to determine the valuation of your enterprise are cash flow, earnings and assets.  More importantly, if you are not planning to go public, you should decide on a given set metrics  and routinely use them.  Using this valuation helps you determine if you are meeting your objectives (and, in the case of buy-sell or divorce, proves prior agreement to the terms and issues).

For a complete discussion of these issues (including methods of valuation and resources, please click here.  (Sorry, folks, this is already too long.)Roy A. Ackerman, Ph.D., E.A.

 

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