PPM - What is My Business Worth Part 1

May 29, 2012 - PRLog -- As a Merger and Acquisition firm, we often receive the following question from entrepreneurial business owners - how do I know what my business is worth?

Business owners are commonly looking for an estimate of value to determine if they should consider selling now or sometime in the future. There are many unique factors to consider when valuing any business. In this 2 part release we will provide some background and take some of the mystique out of the valuation process.

Multiple of Seller’s Adjusted Net Cash Flow

The most widely used method to value privately held companies is based on adjusting or recasting of a business's financial statements. This is also referred to as adjusted EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). Financial statements are prepared for tax purposes, not business sale or business valuation purposes. It is critically important to “read between the lines” of the financial statements to determine the true earnings capability of the company. At Sun, we thoroughly review each and every line item to identify any one-time or non-recurring expenses, shareholder fringe benefits and perks, non-cash expenses, and more. There are over 50 potential adjustments that we look for during this process. The goal is to determine the true earning capability of the business by adding back all of the non-essential, non-recurring, or discretionary expenses to the net profit. This demonstrates a more realistic net cash flow for a potential acquirer.

Once the adjusted earnings or EBITDA number is determined, the next step is to apply a multiple of earnings. This multiple is impacted by a vast number of risk factors, intangibles, and value drivers. During our valuation process, we typically review and rank the company in approximately 30 value driver factors to determine how the company is positioned. Examples of risk factors and value drivers that influence valuation include: years in business, proprietary content, industry life cycle, industry stability, customer base concentrations or dependencies, supplier dependencies, product or service differentiation, strength and size of market, management quality and tenure, employee dependencies, impending regulation, new technology, and many others. Each of these risks is unique but has one common trait – an ability to either reassure or cast doubt on the predictability of future cash flow. As a result, the better a business can mitigate or control these potential risks, the more positive the impact on valuation.

It is important to determine the predictability and sustainability of earnings. We generally will utilize a comprehensive questionnaire to obtain the information needed to evaluate these factors. A few examples of questions analyzed include:

•   Why is the business more/less profitable than a comparable company in the same industry?
•   What degree of dependency does the business have on the current owner, vendors, employees, key customers, etc.?
•   How reliable are the historic financial statements of the business?
•   What is happening in the industry that casts doubt on the future income of the business?

These intangibles play a significant role in the valuation process, which is why one cannot solely examine financial information and arrive at a proper valuation.

In the 2nd part of this series we will clarify some industry standards and summarize what you need to consider when placing your business for sale.

To discuss your situation further, contact a M&A professional today on info@panpacificmerger.com