Insights & Info

Insights > How to determine the value of a business

How to determine the value of a business

By Generational Equity

business value

When a business owner decides to sell their company they face a daunting task. Often, when the decision to sell has been made, the natural instinct will be to call a local accountant, attorney or broker. However, the chances are that these professionals are not experts on the matter, or in the case of a broker have a localized view of the market and a restricted network of private buyers. By falling into the trap of not finding an optimal buyer, 75% of business owners sell their company for less than it is worth.

One of the most crucial steps to achieving a successful sale comes in the form of the valuation. Valuing a business accurately is a skill that requires a combination of industry knowledge, experience and proven methodologies. If you are not armed with an accurate figure of your business’s worth when you take it to market then you risk taking a less-than-optimal offer from a buyer. There are a number of methods for valuing a business, these include:

  • Public market comparable analysis
  • Identifying precedent M&A transactions
  • Discounted cash flow analysis
  • Book- or asset-based valuation approaches
  • Applying multiples to revenue, EBITDA (earnings before interest, taxes, depreciation, and amortization), or net income

Deciding which methods to use for valuing your business is a skill that only experienced valuation team can provide, and will often require a combination of all these methods, plus a look beyond these formulas to achieve a fair and accurate figure. A typical valuation undertaken by Generational Equity will involve taking a thorough look at a number of items, including:

  • What the company does and how
  • The company’s customer – who they are, why they buy and how strong they are.
  • Analyzing and recasting the company’s financials
  • Projections of financial statements for the current year and five-year pro forma period based on previous results, management strategies and the operating environment.

The ultimate output of this will come in the form of Generational Equity’s comprehensive Offering Memorandum which will be sent to potential buyers once they have signed a confidentiality agreement. This document will contain your entire evaluation plus a description of its intangible assets, without any mention to the value of the company.

Whilst the value of your company’s intangible assets will vary from buyer to buyer, determining them is a crucial part of the process. However, often a business owner will be so close to their company that they take the intangible assets that make them unique for granted. For example, you may have an established base of trusted long-term employees, a great internet presence or a number of contracts with existing clients. If you are attempting to market your company alone, it is important to meet with a trusted advisor who can help you establish these items.

Thoroughly documenting your company is perhaps the most critical part of the M&A process. If every aspect of your business is not properly documented then the chances are that the offers you receive will not match your expectations. The comprehensive service that Generational Equity can provide as an established M&A advisory firm is invaluable.

To find out more about how Generational Equity (part of the Generational Group) determine the value of a business you can attend one of our complimentary educational workshops. Find your nearest workshop today.

 

Make an informed decision

The best decisions in life are informed decisions. We release educational business insights like this every week. Subscribe to make sure you don’t miss the latest news, views and analysis.

Success

Success, you have been added to our list.

We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.
Karen S. Williams, CFO, BW Manufacturing
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”
Karen S. Williams, CFO, BW Manufacturing
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!
Andy Graham, Vice President, Modern Heating & Plumbing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.
Michael J Polarek, President, Paragon Packaging
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.
Michael J Polarek, President, Paragon Packaging
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers