The challenges of a business valuation

I am frequently asked by CEOs of privately-owned businesses how much their company is worth. I explain that there are different methodologies and a number of factors to consider, and a serious study should be performed to provide an accurate valuation estimate or range of estimates.

Often, they are initially anxious for a “back-of-the-envelope” estimate, and often what I provide is a disappointment. Why? Because these entrepreneurs have invested everything they have in terms of money and time and focus, and the company must be worth more than that!

Thus begins the challenge of educating the business owner on how an independent firm would value his or her business. There are many factors to consider:

The status of the M&A market (robust with more buyers than sellers, or just the opposite with operations underperforming and valuations correspondingly lower).

Risk and opportunity factors specific to the company and its industry (competitors, growth rate of the company’s market, size of the business, international presence, etc.).

In theory, a strategic buyer should be willing to pay more than a private equity buyer due to potential synergies, but this model is not always accurate.

And, of course, there are various ways to value a business, including the frequently used EBITDA x Multiple or Discounted Cash Flow. But even for these familiar models, there are variations. In other words, there is not just one EBITDA calculation that fits all companies.

To summarize, the best approach for an entrepreneur looking for an accurate business valuation is to consult an outside firm. An outside firm can not only provide an independent and objective valuation, but also assist with the following possible undertakings: Actions to take to prepare the company for sale; actions that can improve the valuation; and actions to help the company navigate through the complex steps from initial discussion to closing.

The M&A market is strong – there is plenty of cash seeking deals and valuations can be attractive for the seller based on recent financial performance. Lastly, even if you are not considering selling at the moment, it still makes sense to begin planning for it now.

-Richard Taylor is president of M&A Consultants Ltd. in Milwaukee.

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