By: Mark Gaeto – Managing Partner, Conrad Olenik – Associate
You may have heard that business valuation is as much an art as it is a science, and that certainly holds true. No two valuations are alike, and in the end, your business is worth what someone is willing to pay for it. While it can be difficult to avoid emotion when taking a deeper look at your business, a proper valuation from an outsider’s view can serve as a critical reality check. It will ultimately allow you as CEO to focus on ways to improve the business, prepare for an exit or understand your overall wealth.
Here are four simple steps that can tell you how much your business is worth:
- Assess your financials. When combing through your business’s financial statements, you want to highlight the company’s strengths and simultaneously address the areas of improvement or refinement. It’s always better to expose weaknesses and attend to them before any capital raise or transaction process, and especially prior to the due diligence phase with buyers or investors. An experienced banker can help with recasting the numbers to normalize income by properly reflecting the true costs of operating the business, which often results in an increased bottom line. The removal of non-operating assets, private business owner expenses and one-time costs, and the standardization of wages, benefits and rent to reflect current market rates, will create a baseline EBITDA figure to be used for all valuation multiples.
- Characterize your market. At this point, you’ll want to gauge the overall market, both on a macro and micro level, since risk is a dynamic component of the valuation game. This requires a general understanding of the economic factors on a more granular level, so that you’ll be able to distinguish the company’s customer, technology, regulatory and competitive landscapes. An investment banker or valuation expert can work with owners and management to synthesize and summarize the data, in an effort to succinctly present how your firm provides value to its clients. Together, you can use the analysis to review strategies and any investment needs, as well as evaluate your strategic or exit options. This will also allow you to better identify the right set of buyers or investment groups – ones where you can match seller expectations and the best valuations. From an M&A perspective, an investment banker will also compare your business to similar public and private firms in the sector, as well as perform analysis on trading prices and recent transaction comparables.
- Calculate your future. After evaluating your financials and studying the market, there are several valuation techniques you can use to determine an appropriate valuation range. It is important to use several different valuation methodologies to help triangulate value and arrive at the closest range possible. The typical valuation methodologies used are: discounted cash-flow analysis, market comparable analysis and precedent transaction analysis. Selecting the proper methods and related assumptions is the artistry of valuation analysis, and the value of an investment banker is shown in their practical transaction experience.
- Value your business. The final element to the business valuation process is driven from the collective expertise of an investment banker’s experiences and their relationship with the business. This is where the artistry is especially important. In conjunction with the above steps, the banker and business owner will look beyond the numbers to seek additional value, in concepts like patents and IP, technology, management, talent, etc. Partnering with an investment bank that focuses in M&A, particularly with operational expertise, will allow you to strategically realize benefits in the valuation process that most bankers would miss. This extra step can be crucial in propelling your business and its inherent worth (and the owner’s and/or shareholder’s wealth) to a higher level.
As CEO, you know the concept of creating value for your clients and you know it well, but it’s often difficult to pinpoint exactly how that translates into an enterprise valuation. It is critical for any business owner to spend the time and effort now to properly analyze your financials and study the market, which will allow you to calculate your future and ultimately value the business. The above four points are the basis of business valuation and will help you grow faster and stronger toward the future, as well as create a better and more valuable business in the present.
Mark Gaeto is a managing director with Falcon Capital Partners, a leading mergers and acquisitions firm, where he directs their commercial technology practice.
Conrad Olenik is an associate with Falcon Capital Partners and began his career with JPMorgan Chase.
Mark can be reached at 610-989-8903 or mgaeto@falconllc.com.
