When thinking about taking your company to market the first thing that crosses the mind of most business owners is “what is my business worth?” Sure, you may have hired a valuation firm to put a value on your businesses for estate purposes, but those valuations have no concrete tie to what your business is really worth.
The real answer is that your business is worth what a buyer is willing to pay for it. Any buyer will perform their own valuation, which includes assessing the strategic value of your business in their hands. Your independent valuation, while helpful in some instances (estate planning, buy/sell agreements, etc.), is not something a buyer will consider when valuing your business.
Ok, so what are some other methods that a potential buyer will employ when trying to value your business? Comparable transactions are a reasonable way to understand the relative value of your business. If one of your competitors was recently acquired, and they offer similar products or services to you, it is reasonable to think that their value is in line with yours.
However, the strategic implications of the buyer can certainly swing the value one way or another. For example, a larger strategic competitor will certainly have more synergies and typically see greater value in your business than a purely financial buyer.
Another aspect sometimes used to value businesses is comparing your company that of publically traded companies in the same industry and then discounting the trading multiple. How much the multiple is discounted depends on the buyer, but generally the discount is usually somewhere in the 30% range. The discount is employed because privately held companies are not liquid in the way that public companies are.
Doing It the Hard Way
The best way to really find the value of your company is to put the work in. There is no simple model or formula that can truly generate an accurate valuation. Hiring an investment banker or M&A Advisor to market your business in a professional manner to multiple parties in the best way to really understand the value of your business.
An M&A Advisor or investment banker will put together a selling document called a Confidential Information Memorandum (CIM) detailing all aspects of your business including core competencies, growth opportunities, strategic considerations and historic and projected financials. This will really give potential buyers a true understanding of your business. An investment banker or M&A Advisor will also facilitate meetings between you and potential buyers so that those buyers can ask any questions and understand the potential of your business.
Marketing your business to multiple buyers in the hope of generating multiple offers in an auction setting will give you, the seller, the opportunity to understand the way multiple parties would value your business. If one of those offers is acceptable then you’ll truly know what the value on the business is.
So, like everything else in life, there is no easy way out. The only way to really understand the value of your business is to take it to market and put it in front of potential buyers.