10 Aug Establishing an Asking Price?
One of the first questions that are asked when business owners are considering the option of selling his or her business is “how much is it worth?” This is a great question that many techniques have been developed to answer. Some valuations are generated through a discounted cash-flow, others are generated through an EBITDA multiple, others are generated through a market value of all of the company’s assets. Lets take a look into each technique.
Discounted Cash-Flow (DCF): this is generated by using historical data and future expectations to generated a forecast of how much cash-flows the business will experience over a given time period—generally five to ten years. After the forecast is generated then a discount rate is used to give a present value of the future cash-flows. The discount rate is often one of the most controversial issues in a DCF valuation. The opinions about what rate is apply vary so widely that most analysts will always provide a different value.
EBITDA Multiples: Most use a multiple of, give or take, 4X EBITDA. The factors that determine whether to use a higher or less than multiple depend on the industry average and the factors within the particular business that would make it worth more or less. This method is often employed to avoid the use of so many variables the are included in a DCF.
Asset Valuation: This is the technique that is used to replace the value when the DCF and Multiples produce a value less than the market value of the assets. This is often the case when businesses just aren’t producing like they probably could be. This can also apply in industries, such as construction, that are so capital intensive that they just don’t offer a very good return for the dollar invested.
When all is said and done a business is valued the same way a pencil, car, picture frame, or any other object is valued. It is worth whatever the market is willing to pay for it. If an analyst performs a valuation and no one is willing to make an acquisition at that price then that is not what the company is worth. If an auction is put together on a business then all of the bidders will continue to push the price up till it reaches its true value.
This is why we highly recommend that you engage the experts as Deal Capital. We will give you a range that we believe your business will be able to sell for, but don’t stop there. We will work especially hard to ensure multiple buyers are brought to the bidding table to ensure that they push the asking price to the true market value of your company.