VALUATIONS
Establishing a value and the Most Probable Selling Price is the first step towards selling your business. At Omnium, our brokers work with business owners to determine what their business is worth and what they can reasonably be expected to receive when their business is listed for sale. Several valuation methods and approaches exist. Understanding and applying the correct valuation method to a given business is key to unlocking maximum value. Regardless of whether you are planning to sell a business now or in the future, understanding what your business is worth is the ideal way to ensure you obtain the highest value when you are ready to sell.
HOW IS VALUE CALCULATED?
Every business and industry is unique and there are a multitude of variables that can either positively or negatively affect the value of a business including:
- Financial Strength of the business
- Future Growth potential of the business and industry
- Length of time the business has been established
- Owners involvement in day-to-day operations
- Customer Diversification
- Degree of recurring revenues.
- Amount of competition and degree of market share the business has
- Barriers of entry into the industry
- Business unique value proposition
- Customer satisfaction with the business.
In general, if earnings are consistent and growing, the value of the business is on the higher end. If earnings are fluctuating or declining, then value is on the lower end. Often times, phrases like “businesses in this industry tend to sell for 3x EBITDA” or “there were a dozen other businesses like mine that averaged a sale price of 0.7x Revenue or 2.5x Seller Discretionary Earnings” tend to get thrown around. Although it is common to use rules of thumb or simple market comparable approaches, the outcome is often a highly inaccurate valuation, as these approaches neglect to take into many of the factors discussed above.
Omnium brokers take an evaluation approach that comprehensively examines 4-7 years of financial performance and considers both quantitative and qualitative data, while using a variety of approaches in estimating business value. This results in providing you with a thorough understanding of how the market will perceive the value that your business brings to the table.
ASSET APPROACH (ASSET-BASED VALUATION METHOD)
An asset-based valuation approach examines the value of a company’s assets or the fair market value of total assets, after deducting any liabilities. There are two common asset based approaches used regularly:
Liquidation Value:
If a business has been determined to no longer be viable as a going concern, it will be valued on a liquidation basis which is the estimated value of an asset if it must be sold quickly.
Adjusted Net Book Value:
This method involves making adjustments to assets and liabilities on a company’s historical balance sheet so that they are restated to their realizable values.
MARKET APPROACH (MARKET-VALUE VALUATION METHOD)
This highly subjective approach is used to determine the value of a business by comparing it to what other similar businesses have sold for. The success of this approach depends largely on the availability of sufficient market data on competitors.
INCOME/EARNINGS APPROACH (DISCOUNTED CASH FLOW VALUATION METHOD)
Discounted Cash Flow Method:
This analysis relies on the principle that an investment made today is worth an amount that is equal to the sum of all future cash flows it will produce, discounted to their present value.
Capitalized Cash Flow Method:
The capitalized cash flow method is used as the most appropriate method when a company’s current level of operations is determined to be indicative of future operations and the company’s growth rate is projected to grow at a stable and modest rate.
Iterative Discounted Cash Flow (IDCF) Analysis:
This methodology is used with larger companies but is an arduous and comprehensive analysis that seeks to optimize the price of the company for the seller subject to meeting the buyer’s financial return objectives.
To learn more about the sale of your business, we encourage you to reach out for a no-obligation meeting to discuss the value of your business. (insert a contact us form).