Making sense of business valuation

If you want to get a fair price for your company (or improve the sellability of your company), you need at least a basic understanding of business valuation.

You don’t need to become an expert in valuation, because you won’t have to handle the entire valuation process yourself. But understanding it will help you navigate the process.

Here, in a nutshell, is a crash course in what you need to know about valuation.

1. Value is subjective

In the modern consumer economy, prices are standardized. When it comes to selling your business, you need to think outside of that paradigm. There is no objectively fair price for any private company.

The final price of your company will be the result of a negotiation between you and the buyer. To make your case, you’ll need to support it with various valuation methods, and as much detail as you can muster. More on that below.

2. Understand the buyer’s perspective

Much of the time, the buyer is going to be an investor with capital. Even if you’re selling to a local competitor or somebody within the company, it’s important to approach valuation with the investor’s attitude. That means viewing the company as revenue stream that can be acquired for a certain price.
As with any investment, risk will be an important factor in how much the buyer is willing to pay. If you can identify and reduce risks, the buyer will be willing to pay more.

3. Four common methods of valuation:

  • EBITDA: Earnings Before Interest, Tax, Depreciation, and Amortization
  • Extrapolation of the value of publicly traded companies
  • Comparable sales
  • Discounted Cash Flow

Keep in mind that these methods only provide benchmarks, and they each have their own limitations.

Take comparable sales, for example. What makes a sale comparable? Who’s to say that “comparable” sales were of a fair value in the first place?

To learn more about these methods of valuation, see this article.

4. Track and visualize your KPI’s

There are an infinite number of different Key Performance Indicators you can track. Covering the most important ones will help you paint a detailed picture of why your company performs the way it does. It will also help to demonstrate how much potential for growth your company has.

This article covers a list of useful KPI’s to track.

5. Details matter: don’t overlook these things

Once you’ve built a general idea of the value of your business using common valuation methods, you can start to enrich the picture by digging into some finer details.

To get the most for your business, you’ll need to quantify as many aspects of your business as you can. Anything your company has ever spent time or money on has some sort of value. So does anything that gives you a competitive edge in the market. That includes contracts, data, physical assets, and intellectual property. See this article for several things that might significantly change the market value of your company.

Increasing the value of your company

As you can see, it’s a fair amount of work to draw a detailed and accurate picture of what your company is worth. That’s why we say that the best time to start understanding and improving the market value of your company is always today. It takes time, and once you have a clear picture, it takes more time to raise those numbers.

If you don’t start thinking about the market value of your company until six months before you list it, the difference in final price could be thousands to hundreds of thousands of dollars.

Business owners in Seattle, Bozeman, Pittsburgh and Palm Springs can contac Free Vector Advisors for help in building, marketing and selling their company.

Leave a Reply

Your email address will not be published. Required fields are marked *