How Does Your Business Compare?
When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?
Value Driver | Low | Medium | High |
---|---|---|---|
Business Type | Little Demand | Some Demand | High Demand |
Business Growth | Low | Steady | High & Steady |
Market Share | Small | Steady Growth | Large & Growing |
Profits | Unsteady | Consistent | Good & Steady |
Management | Under Staffed | Okay | Above Average |
Financials | Compiled | Reviewed | Audited |
Customer Base | Not Steady | Fairly Steady | Wide & Growing |
Litigation | Some | Occasionally | None in Years |
Sales | No Growth | Some Growth | Good Growth |
Industry Trend | Okay | Some Growth | Good Growth |
The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.
As part of your overall exit strategy, what can you do to improve your company?
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: kconnors via morgueFile
How Does Your Business Compare?
When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?
Value Driver | Low | Medium | High |
---|---|---|---|
Business Type | Little Demand | Some Demand | High Demand |
Business Growth | Low | Steady | High & Steady |
Market Share | Small | Steady Growth | Large & Growing |
Profits | Unsteady | Consistent | Good & Steady |
Management | Under Staffed | Okay | Above Average |
Financials | Compiled | Reviewed | Audited |
Customer Base | Not Steady | Fairly Steady | Wide & Growing |
Litigation | Some | Occasionally | None in Years |
Sales | No Growth | Some Growth | Good Growth |
Industry Trend | Okay | Some Growth | Good Growth |
The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.
As part of your overall exit strategy, what can you do to improve your company?
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: kconnors via morgueFile
Read MoreValuing the Business: Some Difficult Issues
Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.
Here are some issues that must be considered when arriving at a value for the business:
Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.
Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.
Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.
Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.
ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.
Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.
Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: DuBoix via morgueFile
Read MoreTwo Similar Companies ~ Big Difference in Value
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:
- The Market
- Management/Employees
- Uniqueness/Proprietary
- Systems/Controls
- Revenue Size
- Profitability
- Regional/Global Distribution
- Capital Equipment Requirements
- Intangibles (brand/patents/etc.)
- Growth Rate
There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:
- Are the company’s projections believable?
- Where is the growth coming from?
- What services/products are creating the growth?
- Where are the customers coming from to support the projected growth – and why?
- Are there long-term contracts in place?
- How reliable are the contracts/orders?
The difference in value usually lies somewhere in the company’s growth rate!
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: jeltovski via morgueFile
Read MoreThree Basic Factors of Earnings
When evaluating businesses for sale, it’s crucial to look beyond the raw earnings numbers and consider several key factors that provide deeper insight into the company’s financial health and future prospects. Here are three critical aspects to examine:
1. Quality of Earnings
The quality of earnings measures how accurately the reported earnings reflect the true operational performance of the business. High-quality earnings come primarily from core business operations, while low-quality earnings may be inflated by one-time events or accounting maneuvers. At Indiana Equity Brokers, we carefully analyze earnings quality by scrutinizing:
- “Add backs” and non-recurring items
- One-time events like property sales
- Extraordinary expenses and their frequency
- Allowances for typical annual extraordinary costs
Beware of valuations that completely eliminate all extraordinary items, as some level of unexpected expenses is normal for most businesses.
2. Sustainability of Earnings Post-Acquisition
Buyers must consider whether the reported earnings represent a peak in the business cycle or if they can be sustained and grown after the acquisition. Key questions to ask include:
- Is the company at the top of its growth curve?
- Can the previous growth rate be maintained?
- Are there untapped opportunities for expansion?
Our team at Indiana Equity Brokers can help you assess the future earnings potential of a business and identify growth opportunities.
3. Verification of Information
The accuracy and reliability of the financial information provided is paramount. Buyers should verify:
- Timeliness and accuracy of financial reports
- Allowances for potential product returns
- Provisions for uncollectible receivables
- Overall integrity of the seller and potential undisclosed issues
A thorough due diligence process is essential to uncover any “skeletons in the closet” and ensure you have a complete and accurate picture of the business’s financial situation. By carefully examining these three factors – quality of earnings, sustainability, and information verification – buyers can gain a much clearer understanding of a business’s true value and potential. This deeper analysis goes far beyond simple earnings numbers and is crucial for making informed acquisition decisions.
Read More