Making Sure the Price is Right
If you value your business, do not underestimate its significance
By Patrick Hanraty, Daedalus Financial Group
What is your business really worth? It's hard not to wonder. And if you don't know,
you're flying blind.
A company's value is a crucial aspect of everyday business dealings. It helps you
define your overall decisions, including how much you can borrow, whether you need
an estate plan, and what to do when events sneak up on you.
In modern days, valuing a company is less of a guessing game and more of a science.
CASH RULES THE PRIVATE WORLD
First of all, forget about the Dow averages and concentrate on its current and expected
free cash flow earnings before interest, taxes, depreciation and amortization, minus
any capital spending necessary to bring the business up to par.
If you are selling your business any potential buyers will take present cash flow
and project out five years, then set a price on those earnings that guarantees a
decent return.
The price will vary according to the likelihood that earnings will grow, based on
clues such as whether your revenue growth and margins have been consistent. Companies
with clean balance sheets are less likely to face any price cuts than cyclical,
debt-ridden prospects.
Certain intangibles also affect the value of a business. An industrial manufacturer
with five solid customers is likely to fetch a lower price than a similar-size competitor
with 50 outlets because its revenue source is less diversified.
A company that's big enough to go public might begin to trade at stock-like multiples
of earnings or sales. And if you're selling to a “strategic” buyer - someone who'll
use your company to expand his territory orproduct line - you might command a hefty
premium.
SORTING THIS ALL OUT REQUIRES OUTSIDE HELP
Good choices are business brokers, certified valuation analysts (CPAs with more
specialized training), or mergers-and-acquisition specialists.
However, be aware that each group has potential conflicts of interest - brokers,
for instance, work on commission and thus might want to entice you to sell with
a high estimation of price (bait-and-switch).
Before you sign with anyone, make sure they have some idea of what you do. Also,
ask to review prior work to get a feel for terms, and get references from prior
customers.
The valuation firm will be checking you out, too. It may start with a quick once-over
of your company and its industry, comparing profitability, margins and growth before
it decides if the listing fits its skills. If not, you may have to find another
party.
After that, get ready to give your corporate laundry a thorough airing.Expect to
produce several years' worth of financial statements and explain them in excruciating
detail.
One caveat: The cold number-crunching of a valuation may not match what you'll get
from a real bidder with fire in his eyes. Different buyers have different priorities.
That's Business 101: An object's true worth is not what you want it to be, but what
a customer is willing to pay.
Patrick Hanraty is the President of Daedalus Financial Group, a subsidiary of DVIRC,
a full-service consulting firm in Philadelphia, PA. Patrick can be reached at phanraty@DVIRC.org.
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