Building Long-term Value: Plan on It
"Everything has a price, as the saying goes, but a lot of p...
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Understanding what your business is worth can be a critical issue in several circumstances. They can run the gamut from divorce, partnership dissolution, estate issues, buy/sell agreements, ESOPs, or, most commonly, the sale of the business to a third party or key employee. The ultimate determination requires a business valuation.
Regardless of your reasons, you’ll come up against some common methods when having your business valued, including asset-, income-, and market-based approaches. “We rarely weigh the asset approach in our overall value, with the exception of businesses with a high concentration of assets and no intangible value coming from the company’s earnings,” notes Gary Rayberg, president of ROI Corporation, a Weymouth-based business brokerage and business valuation firm.
Two of the most prevalent methods in the income approach include capitalization of earnings and discounted future earnings.
The market approach compares the subject company with sales of similar businesses to estimate a relative value. Two common market approach methods are market value of invested capital to revenue and market value of invested capital to normalized EBITDA. “Earnings multiples tend to be more relevant that revenue multiples,” Rayberg says. “We’ve found that buyers and sellers both want know what market comps show. That said, the market approach is only as good as the data used and the comps analyzed.”
Because business value can change depending on market and other factors, it makes sense to get a fairly consistent handle on the worth of yours, as you never know when it might come into play. “For example, one of our clients—Cambridge Sound Management—had grown beyond the comfort of one of its partners, and needed to engineer a buyout,” says Patrick Padden, senior vice president, Corporate Banking, at Salem Five. “Because they had a history of regular, third-party valuations, there was little, if any, discussion among the parties as to the value of the piece of the company being acquired by the other owner.”
In getting a business valuation, Padden recommends securing the services of a professional third-party valuation firm. “It’s also important for a business owner to try as much as possible to keep the emotion out of any consideration of value,” he adds. “Often, the owners have either started the company from nothing, or have grown it from something very modest. It can be hard to come to grips with the realities of an objective, third-party mathematical equation that places a value on something that has consumed significant time, sweat, angst, and other emotional investments over a period of time, but it should be a truly objective measure.”