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How To Value A Company for Acquisition

By Generational Equity

value a company for acquisition

Quite often we meet with potential clients in our fact-finding, initial discovery phase who ask us, “Can you give me an idea what my company is worth?” Naturally, as any professional M&A firm would do, we indicate that without a thorough and complete evaluation of the business, we have no idea of what the company could be worth. Although this does cause us to lose some clients, it is the truth: No reputable M&A advisor should give you any idea how much your company is worth before doing a complete evaluation.

Your next question is probably, “OK, so why is it so important to value a company for acquisition in the first place?”

The answer is simple: Until Generational Equity conducts our valuation of your business, we have no idea what its true profitability is; and if we don’t know that, then we have no idea what future earnings your company will produce going forward. Keep in mind that buyers will review your past, but what they really are buying is the future profitability of your company.

How does Generational Equity determine your true earnings? First, we take your financial statements (preferably at least three years worth) and we determine how “clean” they are. That is, we need to have financial statements that are at a minimum in standard GAAP format (Generally Accepted Accounting Principles) and not jotted down on the back of a napkin.

It is amazing how often we encounter sizable companies that are still using antiquated methods of tracking key financial information. When we are approached by companies like this, we often encourage them to take the time and make the investment necessary to come back to us with financials that are at least created by an accountant using GAAP. Although this may delay the start of your evaluation by a few months, it will ultimately help you find an optimal buyer.

How To Value A Company For Acquisition: The Key First Step

Assuming you have clean financial statements, once you engage us to conduct the evaluation, we send you a document full of questions that are designed to do two things:

  • Help us learn more about your company
  • Help you to start thinking about your business as a buyer would

The 20-30-page survey we send you can be daunting for some business owners. Not to worry, our evaluation pros are more than willing to walk you through the form and get you started on answering the questions. But make no mistake, the questions we ask are really just preparatory questions for the types of things that buyers will ask you later in due diligence. The time you spend up front with our analyst working diligently to cover these items will only help us when negotiating on your behalf later with buyers.

One of the key steps of our proven evaluation method is then to take the info you have provided us in your historical financials and our worksheet and then do what is commonly called “recasting.”

Most business owners have no concept of recasting, so don’t be embarrassed if you fall into this group. Recasting is the approved GAAP process when non-business related expenses are removed from your income statement and/or balance sheet to show the company’s true profitability.

Let’s be honest, you and your accountant have worked hard over the years in legitimate ways to understate your profitability. You may be unaware or even forgotten how the IRS has allowed you to legally suppress your profits. Many clients have lots of items that we can recast such as:

  • Superfluous, excessive, or discretionary expenses
  • Nonrecurring revenue and expenses
  • Family vacations paid for through the company
  • Vehicles leased or owned that are not critical to the business
  • Family members on the payroll
  • Excessive salaries paid to ownership

I could go on and on with this list. Essentially we want to show the true historic financials with all of these items removed. Why do we do this? Because if we don’t, the starting point of your five-year forecasted income statement and balance sheets would not be accurate, enabling buyers to legitimately underbid for your company.

How To Value A Company For Acquisition: Producing A Pro Forma

Once we have recast your historic financials (this process can take anywhere from 2-3 weeks to several months depending on your availability and how clean your financials are), we then work with you to develop a credible revenue and profitability forecast for your company. We call this a “five-year pro forma.”

As mentioned, buyers will review your historical growth and will want answers for any fluctuations in the trend (either up or down). But what any professional buyer is really buying is not what your company has done in the past or the strength of your balance sheet today. No, what a buyer is really buying is the opportunity to earn and retain the profits shown in your five-year pro forma.

Again, this sounds more daunting than it really is. Our professional evaluation team has decades of experience working with business owners just like you to develop a forecast that is achievable, and from there, to develop defendable profit and loss statements that form the core of your evaluation.

One Method Does Not Fit All

Once the recasting is completed and an agreed upon pro forma is finalized, our team then determines which of all the various valuation methods out there are most credible for your company and industry. This is where the real “art” of valuing a business comes in, because there are a number of methods that can be used such as:

  • Precedent transactions – completed deals in your industry that are potential indicators of value for your company
  • Public company comparables – this method uses publicly traded companies and their valuations to make a case for yours
  • Industry-developed rules of thumb – history has proven that in some industries deals are “normally” closed based on standard norms like 2x annual earnings plus (or minus) “X,” with X being any financial item your industry typically uses for valuations
  • Discounted cash flow (DCF) – this method takes your projected earnings after recasting and “discounts” them back to today’s dollars using a discount rate based on the relative “riskiness” of your opportunity

This is just a sample – there are a number of other methods used as well, many that can be unique to your industry and/or situation. The reality is, our team will typically look at 4-5 models in determining value and then use the one that is most defensible in the market. As you can imagine, developing the skillset to do this takes years. Fortunately our evaluation team is second to none in our industry in terms of experience and creativity in determining a company’s value.

Conclusion

That, in essence, is how to value a company for acquisition. In a thousand words or so I have covered what normally takes just part of a full day in a Generational Equity M&A seminar. If you are interested in learning more about our award-winning process, I encourage you to attend one of our complimentary, no-obligation M&A meetings entitled “How and When To Exit Your Company for the Most Profit – a Planned Exit Strategy.”

While at the seminar you will be able to visit one on one with our M&A professionals, who can discuss your specific situation and needs. But don’t expect them to tell you what your company is worth in that initial meeting. Remember, we need to do a full evaluation first.

To learn more please fill out a contact form or call us at 1-972-232-1121. If you decide not to work with us, please use a professional firm to represent you and avoid anyone who indicates that they can “value” your firm in any initial meeting.

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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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
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
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 take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.
Shane and Johanna Kline, Owners of Vision Upfitters
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.
Salvo Stoch, Founder and CEO of Sleeping Partners
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
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
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.
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
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.
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!
Tom Currier, Former President & CEO, Rackmount Solutions
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
Rick Greene of Dobbs Equity Partners LLC
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.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
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 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
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