Valuation - How Much is My Company Worth?
Sell Side Quarterbacks believes in efficient market theory which maintains assets like companies are accurately priced by the market. However when it comes to privately held companies, the market is notoriously inefficient in setting a fair market price due to lack of transparency and the relatively small number of transactions that are truly like-to-like. That being said, the value of a business is what a buyer will pay for it.
Why is Valuation important?
A valuation supported by solid analysis is an important negotiating tool when Sell Side Quarterbacks are trying to convince a buyer of the company value and to reassure you that we are suggesting a fair price. As in valuing any asset as complex as your business, the devil is in the details – to do a business valuation that will stand up under the scrutiny of a buyer, requires data (lots of data), the proper tools, skill and experience.
Alternative Valuation Methodologies
Different types of buyers in different situations may put wildly different valuations on your business depending on their unique circumstances. For example a competitor (also known as a strategic buyer) may value your business more highly than a financial buyer because they can reduce overhead on day 1 and see an immediate increase in profits. On the other hand a financial buyer may value your business more highly than a competitor because they are looking for a platform company to provide an anchor for buying other companies.
The value of your business is a moving target influenced by market conditions, regulations, competitive position and other factors. Are business value and expected selling price the same?
Not always as many intangibles come into play ranging from your motivation to sell such as the death of the founder to the buyer's motivation to buy - do they value high growth rates, stable customer relationships, do you have unique intellectual property?
Market exposure is key which is why Sell Side Quarterbacks “boils the ocean” looking for prospective buyers - family offices, strategic buyers, VC and Private Equity firms. Our goal is to put your company in front of the right buyers that meet your goals for selling and play one off against the other to set up an auction situation to ensure the top selling price.
Sell Side Quarterbacks approach the question of valuation through three methodologies to develop a sound, defensible value; asset approach, market approach (comparable transactions), and a discounted cash flow approach.
Asset approach
The asset approach starts with your balance sheet - what are the assets and liabilities required to generate the income stream associated with your business? Of course it isn’t as simple as looking at the balance sheet as we wouldn’t be valuing your secret sauce such as patents, trademarks, business processes, internally developed technology or regulatory barriers critical to your business. The real value of the company is greater than the sum of these pieces - which is why a buyer will pay more for your company than trying to buy the pieces to recreate your company.
Market approach
While no two companies are alike, there are enough similarities in the 10,000 to 15,000 businesses which are sold every year. Sell Side Quarterbacks will screen the private market data available through a variety of services that collect the terms and conditions of business sales and find as many comparable transactions as possible. Starting with these as a benchmark, we will derive the appropriate multipliers for EBITDA, Net Revenue and Gross Revenue while taking into account special circumstances such as barriers to entry such as a difficult to obtain regulatory license, intellectual property unique to your company, quality of earnings and other intangibles to support a market driven estimate of the value of your company.
Income approach
The income approach is straightforward and as the name implies the valuation is centered on the income stream your business has generated in the past and can reasonably be expected to generate in the future. To account for the time value of money, the income approach requires us to discount the future income stream by a rate of interest a typical buyer would be willing to accept - usually Prime plus a few hundred basis points depending on the risk involved in generating the future income such as losing a key client. The resulting net present value (NPV) of the business is yet another benchmark of the value of your company.
Summary
Sell Side Quarterbacks will one or more of these methods to calculate the potential sale price of your company and not to be too flippant, but we guarantee two things - the numbers generated by each method will not be identical and like any forecast we know the final number is highly unlikely to exactly match the valuation model prediction of value. Keep in mind, the price a buyer is willing to pay for your company will vary depending on their reasons for buying your company and their perception of the risks involved.