Probably the most common question we’re asked from business owners is, “What’s my business worth?”. Sometimes this is prompted by a business owner seeing other companies in his/her industry being acquired for handsome amounts. Rumors about multiples of earnings or revenues received by others circulate in an industry, fueling speculation and assumptions about one’s own company’s valuation.
In reality, no two businesses are alike, and although the industry sector is an important factor in assessing a company’s market value, it is only one factor, and not necessarily predominant. Many other factors come into play in estimating a possible range of values that a business owner might obtain if the business were properly described and carefully presented to the right set of potential buyers.
What makes a company valuable and of potential interest to buyers? Why do some businesses attract many buyers who bid aggressively for it, while other businesses fail to attract buyer interest?
From experience, we know the following factors are important in estimating a company’s value:
Growth – A company experiencing high growth in recent years and continuing that trajectory in the current year will command a higher price than a company whose growth has flattened, or worse, declined. Regardless of the reasons for flat or declining growth, buyers will be less interested in and generally pay lower multiples for such a company. Conversely, high growth signals a robust, well-managed business with momentum to continue on that path going forward.
Profitability – This matters to most, but not all, buyers. Unless a buyer immediately sees significant opportunity to cut costs and return the business to profitability, then lack of profits will reduce the field of interested buyers. Exceptions exist. For example, in a fast- growing, capital intensive sector where a business has been investing heavily in R&D, but has not yet built sales to match, the business may drive a higher value. It depends…
Market/Customer Traction – Usually a well-diversified, long-tenured, recurring customer base contributes to a more attractive value; however, there are exceptions. We have sold businesses having a high degree of concentration with few (sometimes only one!) customers. While it’s more challenging to find the right group of interested buyers, we have seen competitors, who covet key customer relationships, pay well for even a highly-concentrated business.
IP – If protected by patents, intellectual property (IP) often adds value to a business. If a business has IP but no market/customer traction, then IP alone is not usually sufficient for an attractive sale value.
Revenue – Size matters! Generally, the higher the revenue level and profit margin, the higher the multiple range that will be used by buyers to value a business. Ideally, revenues are recurring and diversified as well. Multiples can vary widely based on many other factors too, so using ‘rules of thumb’ can be misleading. Buyers look at their expected return on investment (ROI) and payback period, as well as strategic factors, to arrive at the price they are willing to pay for a business.
Team – A business that has an established team willing to stay in place once the transaction is complete will have greater value and ‘sale-ability’ than a business that is highly dependent on a few key people. This is especially true if the owner has a skilled team with a clear successor identified.
Summary – Valuation is a complex issue, dependent on quantitative & qualitative factors that relate to each business, its industry sector, market conditions, and – ultimately – how a sale process is conducted. A business needs careful review and thoughtful analysis in order to reasonably assess its potential value to prospective buyers.
So the next time you’re wondering ‘What’s My Business Worth?’ when you hear about others selling their businesses and thinking maybe it’s time to explore, give us a call!