Understanding the key metrics of your business is the key to understanding the true value of the business. It goes beyond the profitability of the business and looks to the market, the opportunity, who is exiting the business, the strength of the customers and the customer contracts. Assessing the value of a company is, therefore, not a science, since it is based on factual information at a specific point in the life of the company, as well as on interpretations. It is a complex task that is best left to a chartered accountant or valuation expert.
Let’s keep in mind three fundamental principles for establishing value:
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it corresponds to what the buyer is willing to pay
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it is based on what future cash flows are worth
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it is based on the value of material assets
Evaluators mainly use three methods:
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By asset
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By yield
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By the market
Asset Method
This is the same method that when dissolving a business. The logic is this: how much would your creditors give to liquidate your assets? In short, it is a question of deducting your debts from your assets (equipment, buildings, etc.) to establish the net worth of the company:
To establish the liquidation value, all assets assigned ridiculous values and all debts recorded at their book value. Most goods, in forced sales, are sold at a discount to their fair market value. The difference between the value attributed to the asset and the real or book value of the liability constitutes the liquidation value.
Yield Method
This method updates, that is to say, it brings the current and future financial flows to the same base, otherwise, they cannot be compared. This method, therefore, makes it possible to assess the company’s future revenues and to calculate their return. A multiplier is then assigned: the higher the risk, the lower the multiplier. This is a frequently used method because it is rather precise.
Market Method
This method is called the “rule of thumb”. Although less precise, it gives a general idea that makes it possible to push the investigation further or not. The calculation is based on comparable companies and multiplies the profit before tax and depreciation by a value, which gives the value of the company. The price range can therefore be very wide. Be careful with this method.
How much is your business worth?
How much is your business worth? Ultimately, it is worth what a buyer is willing to pay. Several elements can help create value for a buyer: a growing market, a unique product or one that has little competition, recurring revenues, a strong brand image etc.
You should aim to consult an advisor for a professional business valuation. An advisor can offer you valuable advice and help you get the most out of your sale.
Venture Corporate Finance is a middle-market M&A advisory firm for clients planning to sell their businesses, raise capital, restructure, or grow with acquisitions. We provide independent advice and bespoke transaction solutions to meet their specific objectives.
For more information on corporate finance and M&A services, contact Venture Corporate Finance.
