Are you preparing for a business sale? A key question you may ask is “what is my business worth“? The answer, which you probably don’t want to hear is “it depends”! Several factors influence the price of a business.
“Environmental” influences impacting business values are of both an internal and external nature. External environment includes the type of buyer, the industry & market conditions while internal factors are specific to the business include size and type of business, strategic model, “business condition”, maturity, business risk, historic and future growth rate (growth opportunities), timing of the sale and seller motivation/reason for sale.
Buyers fall broadly into two broad categories, those that are external and those internal to the business. Internal would include employee share offers, family members, management buyout, co-owner buyout etc. External buyers include – strategic/trade buyers (undertaking vertical or horizontal expansion acquiring competitors, suppliers, customers), industry rollups, financial investors (ROE focus), public offers and others. Buyers may acquire all or part of the business. Each buyer will have different valuations based on their own business type and their environmental influences. Each buyer then applies what they see as a suitable valuation method including variants of “upside”, “downside” and “business as usual” scenarios. They may also include synergies. The buyer is however further influenced by needing to have a competitive offer in order to secure the opportunity!
Valuation Methods – What is My Business Worth?
Valuation methods are extensive ranging from – auction value of assets, balance sheet book value, replacement asset value, “fair market value” (3rd party industry valuer), financial market value, owners value to strategic value and public value. Further complicating matters, these valuation methods are then overlaid with the “environmental” factors and the buyer types outlined above.
Multiple of EBITDA
The most common valuation method, amongst many, in use for gaining an understanding of “what is my business worth” is a “multiple of EBITDA”. The “multiple” is determined by the future risk adjusted opportunity which is identified by the buyer but with some help from the seller. It takes into account environmental influences and buyer types; the EBITDA is determined by the past (or future) performance of the business, typically adjusted to exclude abnormal costs. Adjusted EBTIDA could be that of the past 12 months or more, averaged or weighted as required.
Using an experienced advisor assists in understanding what typical valuation multiples to use with the various buyer types and environmental influences. The advisors views may well be different to a business valuer, the owners value and probably very different from the values advised by accountants, lawyers and friends. The advisors value typically reflects an understanding of the market value of completed deals for similar businesses to similar buyers! As depicted in the chart above, what multiple to apply to a deal is not unique and it depends. When asking the rather straightforward question “what is my business worth”, the simple answer unfortunately is “it depends”!