Valuing a business
Discussion
KevF said:
Is there a basic generic formula for valuing an operational business with a potential to sell??
Yes, get someone interested and ask them how much cash they will give you.Edited by KevF on Tuesday 3rd March 18:35
Everything else is completely hypothetical and each one gives widely differing results and usually ends up nowhere near to the above.
Ok, well I have been offered a business but the value that I have been given doesnt sit where I think it should be. I know the vendor is asking over the odds( as you would) but to ensure I am being fair, I wondered if there was a rule of thumb used in these case rather than me work out my version.
Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
Edited by KevF on Tuesday 3rd March 21:56
KevF said:
Ok, well I have been offered a business but the value that I have been given doesnt sit where I think it should be. I know the vendor is asking over the odds( as you would) but to ensure I am being fair, I wondered if there was a rule of thumb used in these case rather than me work out my version.
Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
PM me some basic details, including:Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
Edited by KevF on Tuesday 3rd March 21:56
Sector;
Turnover;
EBITDA;
Current owners' salary;
Shareholders Funds / Net Assets;
I might be able to give you some pointers!
If it's a one man band sort of business, when Ben Lovejoy was selling his nurburgring.org.uk website he wanted about £25k based on £10k net income from the site, including perks such as free accommodation and annual ring pass etc. I think he mentioned a 2-3x net benefit to the owner multiple to value it. There was a For Sale sign on the site in January but it's gone now, but I suspect he didn't get a good bid.
Bigger profitable businesses use EBITDA multiples of anywhere from 5-15x but it depends on lots of factors, including forward multiples where you take an average of expected EBITDA over the next few years. We are obviously much nearer the lower end of that range now than 18 months ago.
On the stock market anything over 20x the following year's estimated earnings per share should have a very good story to justify its valuation.
Agreed that ultimately it's only worth what somebody is willing to bid.
Bigger profitable businesses use EBITDA multiples of anywhere from 5-15x but it depends on lots of factors, including forward multiples where you take an average of expected EBITDA over the next few years. We are obviously much nearer the lower end of that range now than 18 months ago.
On the stock market anything over 20x the following year's estimated earnings per share should have a very good story to justify its valuation.
Agreed that ultimately it's only worth what somebody is willing to bid.
As has been said before, there's no one formula. It depends on your circumstances. There is some common sense that can be applied though.
From a seller's point of view, it's the number that you'll be prepared to walk away for. That might be a magic number, might be aligned to your expectations for the business or just a gut feel.
From a buyer's perspective, it's down to how quickly you want to earn your money back. You look at the business, make adjustments for how you intend to run it and make your own profit forecast. Then work out how many years it will take to recoup your money. If that figure is in the same ballpark as the seller's then it's worth talking.
From a seller's point of view, it's the number that you'll be prepared to walk away for. That might be a magic number, might be aligned to your expectations for the business or just a gut feel.
From a buyer's perspective, it's down to how quickly you want to earn your money back. You look at the business, make adjustments for how you intend to run it and make your own profit forecast. Then work out how many years it will take to recoup your money. If that figure is in the same ballpark as the seller's then it's worth talking.
srebbe64 said:
KevF said:
Ok, well I have been offered a business but the value that I have been given doesnt sit where I think it should be. I know the vendor is asking over the odds( as you would) but to ensure I am being fair, I wondered if there was a rule of thumb used in these case rather than me work out my version.
Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
PM me some basic details, including:Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
Edited by KevF on Tuesday 3rd March 21:56
Sector;
Turnover;
EBITDA;
Current owners' salary;
Shareholders Funds / Net Assets;
I might be able to give you some pointers!
superlightr said:
srebbe64 said:
KevF said:
Ok, well I have been offered a business but the value that I have been given doesnt sit where I think it should be. I know the vendor is asking over the odds( as you would) but to ensure I am being fair, I wondered if there was a rule of thumb used in these case rather than me work out my version.
Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
Sure!Each person I have spoken to seems to have a different idea of how much their business is worth and how this value is worked out.
How do you ensure you are not undervaluing to a point of insulting the vendor and potentially losing the offer.
I wondered if there were accountancy guidlines available when working this value out.
Obviously fixtures and fittings, staff, goodwill are included in the value. How is goodwill measured?
Edited by KevF on Tuesday 3rd March 21:56
PM me some basic details, including:
Sector;
Turnover;
EBITDA;
Current owners' salary;
Shareholders Funds / Net Assets;
I might be able to give you some pointers!
PetrolTed said:
As has been said before, there's no one formula. It depends on your circumstances. There is some common sense that can be applied though.
From a seller's point of view, it's the number that you'll be prepared to walk away for. That might be a magic number, might be aligned to your expectations for the business or just a gut feel.
From a buyer's perspective, it's down to how quickly you want to earn your money back. You look at the business, make adjustments for how you intend to run it and make your own profit forecast. Then work out how many years it will take to recoup your money. If that figure is in the same ballpark as the seller's then it's worth talking.
There speaks a voice of experience....;) From a seller's point of view, it's the number that you'll be prepared to walk away for. That might be a magic number, might be aligned to your expectations for the business or just a gut feel.
From a buyer's perspective, it's down to how quickly you want to earn your money back. You look at the business, make adjustments for how you intend to run it and make your own profit forecast. Then work out how many years it will take to recoup your money. If that figure is in the same ballpark as the seller's then it's worth talking.
Thanks.
coyft said:
srebbe64 said:
It's worth what anyone's prepared to pay for it. In terms of formulas, the most common is a multiple of EBITDA - but then 'what multiple do you apply?'
About half of what you'd applied last year.KevF said:
Looking at the FAME report, it only gives a % for EBITDA which isnt a problem working out a £'s value but using a 2x base, that puts it a way over where the vendor values it.
How does one give goodwill a value though?
Employ someone to hold your hand maybe?How does one give goodwill a value though?
Are you getting any DD done?
I presume (since you're asking on PH, rather than your accountant) that it's a pretty small deal. The approach will depend on transaction size (and therefore risk).
Can I ask what headline the vendor is pitching for at the moment?
coyft said:
srebbe64 said:
coyft said:
srebbe64 said:
It's worth what anyone's prepared to pay for it. In terms of formulas, the most common is a multiple of EBITDA - but then 'what multiple do you apply?'
About half of what you'd applied last year.coyft said:
srebbe64 said:
coyft said:
srebbe64 said:
coyft said:
srebbe64 said:
It's worth what anyone's prepared to pay for it. In terms of formulas, the most common is a multiple of EBITDA - but then 'what multiple do you apply?'
About half of what you'd applied last year.Entrepreneurs
Should You Sell Your Company?
Sharif Tanamli and Eric Lomas 02.03.09, 5:42 PM ET
The pundits would have you believe deal making has all but dried up in
this dismal, credit-starved economy. Take a closer look, though, at
the market for smaller companies and the picture isn't so dire.
According to Thomson Reuters, the dollar value all of mergers and
acquisitions in the U.S. totaled $1.1 trillion through Nov. 30,
2008--a painful 30% drop from the same period just a year earlier. Yet
while overall volume is down, the number and mean valuation of
transactions worth $100 million and below have held up.
The Deal Pipeline estimates that the number of deals in that range
during the first three quarters of 2008 increased by 15% over the same
period in 2007. And valuations, while down slightly, have held up
reasonably well relative to transactions involving larger firms.
Reason for this resilience: Smaller companies still fuel the growth of
larger acquirers. Moreover, many of those smaller firms are privately
held--meaning that there's less pressure to choke down a modest
valuation to appease antsy shareholders.
In Pictures: Seven Tips On Selling Your Business
In Pictures: Six Ways To Raise Cash--Now
In Pictures: Timely Tips For Recession-Racked Business
Why sell? The reasons run the gamut--succession issues, estate and tax
planning, the threat of deeper-pocketed competitors or just the simple
exhaustion of managing a business. The key is understanding your
options.
Start with who's buying. There are two major types of acquirers:
strategic buyers and private-equity players. Strategic acquirers tend
to be larger companies that would rather simply bolt on a fully formed
business or product line than build it from scratch. Some may be
willing to pay dearly for the chance to instantly increase their
market share or snag a proprietary technology. Such a sale may mean
handing over the keys to the business entirely.
For entrepreneurs who want to stay on but hedge their bets from a
valuation perspective, a sale to a private equity shop may make
sense--especially if the business is intended to be a new platform for
a larger entity the PE shop has yet to piece together. In these deals,
the entrepreneur often is left with a minority stake (that's the
hedge). With any luck, the PE shop unloads the business five years
later (or maybe longer in this environment) and the entrepreneur gets
a second bite at the apple.
Prepare to be creative and flexible with the financial structure,
especially with private-equity buyers. For a feel of your options,
consider a theoretical company with $25 million in annual revenues and
no cash or debt on its balance sheet. Say a private equity player bid
$30 million for it, while a strategic buyer bid $33 million.
OPTION A. The seller accepts the strategic buyer's $33 million, all
paid in cash at the closing. Clean and neat--which things rarely are.
OPTION B. The seller agrees to a $30 million valuation from the PE
investor. The deal includes $20 million paid in cash at closing; a $10
million note (meaning the seller is helping to finance the deal, but
that his position in the new capital structure is subordinate to the
bank that financed the deal); and an "earn-out" based on the company
hitting certain milestones during a specified period of time worth
perhaps another $8 million. If all goes well, the deal is potentially
worth up to $38 million (excluding the time value of money effect).
OPTION C. The seller agrees to a $30 million purchase price, broken
down as follows: $20 million in cash, a $10 million note--but instead
of the earn-out as in Option B, the original owner gets to re-invest
with the new equity investors at the same cost of equity. Without
getting into the math, the point here is that the seller gets the
benefit of the buyer's access to cheap financing (which there isn't
much of right now). That way the seller might reap a windfall on the
future equity value of the company.
OPTION D. Seller takes $25 million in cash at closing, along with the
right to retain certain intangible assets, real estate holdings and
intellectual property agreements--and the future income streams they
kick off.
The permutations are myriad. Just remember: No matter what route you
choose, shop around. The more suitors you attract, the higher
valuation you'll get.
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