Business Valuations: Some Difficult Issues

Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate. Here are some issues that must be considered when arriving at a value for the business: Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms. Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue. Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value. Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption. ESOP … [Read more...]

Two Similar Companies – Big Difference in Value

Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference? One can look at the usual checklist for the answer, such as: The Market Management/Employees Uniqueness/Proprietary Systems/Controls Revenue Size Profitability Regional/Global Distribution Capital Equipment Requirements Intangibles (brand/patents/etc.) Growth Rate There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For … [Read more...]

A Reasonable Price for Private Companies

What is a reasonable price for private companies? Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their financial issues and other information than the privately-held ones. This makes digging out information for a privately-held company difficult for a prospective purchaser. So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already. Another expert has said that when the seller of a privately-held company decides to sell, there are four estimates of price or value: A value placed on the company by an outside appraiser or expert. This can be either formal or informal. The seller’s “wish price.” This is the price the seller … [Read more...]

What Is A Business Worth?

What is a business worth? Many courts and the Internal Revenue Service have defined fair market value as: “The amount at which property would exchange between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.” You may have to read this several times to get the gist and depth of this definition. The problem with this definition is that the conditions cited rarely exist in the real world of selling or buying a business. For example, the definition states that the sale of the business cannot be conducted under any duress, and neither the buyer nor the seller can be pushed into the transaction. Such factors as emotion and sentimental value cannot be a part of the sale. Surprisingly, under this definition, no actual sale or purchase has to take place to establish fair market value. That’s probably because one could never take place using the definition. So what does make up the value of a … [Read more...]

Checklist for Valuation

  One of the first things you need to accomplish when you decide to sell your business is a valuation. A valuation will inform you on how to properly price your business depending on multiple factor. Although it is recommended that you hire a business broker or a licensed individual to price your business, below is a checklist for valuation to help you get started: 1. Start with the business –  Value Drivers:  Size, growth rate, management, niche, history –  Value Detractors:  Customer concentration Poor financials Outdated M&E Few assets Lack of agreements with employees, customers, suppliers Poor exit possibilities Small market Potential technology changes Product or service very price sensitive 2. Financial analysis: Market Value – comparables Multiple of Earnings – based on rate of return desired 3. Structure and terms: 100% cash at closing could reduce price 20% 4. Second opinion: Even professionals need a sounding board 5. Indications of … [Read more...]

What is the Value of Your Business? It All Depends.

The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered. Does an owner need to know for estate purposes? Does the bank want to know for lending purposes? Is the owner entertaining bringing in a partner or partners? Is the owner thinking of selling? Is a divorce or partnership dispute occurring? Is a valuation needed for a buy-sell agreement? There are many other reasons why knowing the value of the business may be important. Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. … [Read more...]