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10 Methods for Business Valuation

When the time comes to put up the tools and walk away from a business which you have grown to both love and hate, how do you determine a proper valuation for your privately held business? Does it have to do with the management team, your customer base, or your brand? Is it the equity held by the partners? Certainly, there must be a computing weight from many factors when it comes time to value your business before you put it on the market. There must be more than just the standard answer of “it’s all in the EBTDA.” For those interested, here are 10 pointers which should be taken into account when it comes time to sell the business.

1. Company Cash Flows

How well your business does or has done in the past is oftentimes judged by the cash flows your business has been able to garner through the years. Does it currently have cash flows? If so, what are they and how are you able to value that in today’s dollars? Many people think profits are what is important in business valuations, but really it is consistent and strong cash flows for the company now and promises of them for the future.

2. Relevant Customer Base

How does your customer base look? Is it made up of a focused niche in a small area of the country with most of the revenues coming from one client? Do you sell to consumers or to other businesses? If the business is composed of blue-chip technology companies, then you certainly are looking at a different and most-likely higher valuation than a company who sells a single consumer good whose hayday has come and gone.

3. Goodwill and a Good Story

Much of what is considered “soft” marketing materials for merger and acquisition specialists is vitally important for those looking to purchase the business, whether they are private equity investors or a publicly-traded organization. How the business is presented in the prospectus says a lot about how much you are able to cash out for. In addition, market potential is another good point which should be weighed in carefully. Which brings me to my next point.

4. The Number of Buyers

It’s a simple issue of supply and demand if several companies think your business has an extreme case of goodwill, then it may be sold for much more than it was originally anticipated you would sell it for. This can be seen on Wall Street occasionally when a company gets bid up for a price much higher than their discounted cash flows would indicate. And, the purchasing firm becomes the bearer of a large amount of “goodwill” which is written on the balance sheets. Lucky is the company who has fortune smile on them with multiple bidders.

5. Market and Industry Outlook

If the industry and overall market have a good outlook, this is obviously good for the selling company. The company future looks bright and profits are on the up-and-up. Future growth projections always look bright and rosy when the economic conditions reflect a similar vibe.

6. Depth, Breadth and Experience of Management

In many cases managers of the firm are also owners. That said, it certainly makes it difficult to value a firm based on the management when the management often ends up moving out when the new owner purchases the facility. This is important to note. However, when it comes to many larger deals completed by private equity firms, something different may also be true, the company may be keeping the management. In the case of a deep, experienced and successful management team according to past performance, this is a huge plus for the company’s outlook and valuation from investors.

7. Industry-Specific Consolidation

As the big companies within a specific industry get bigger and the small companies continue to get purchased, it is very evident that prices for the smaller fish rise in accordance.

8. Company History

How successful has the business been in the past? How have systems been implemented that will allow this success to continue forward into the future? If the company has had great successes in the past, then the buyers will expect a repetition. The price goes up.

9. The Industry and Business Type

Intellectual property and specialized tacit knowledge help to up the value of a company. Also, if you are in the technology field sometimes companies can be valued at 10x to 20x their value on paper. This may seem crazy, but it is part of the intangible goodwill spoken of previously.

10. Market Dominance

This is obvious. If you are a big fish in a small pond, you’re worth a great deal more than all the other small fish. Nuff said.

There could be a dozen or more additions to this list, but this should give a general idea on how to value your business and what to do when it comes time to put it up for sale.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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