We last wrote about the various methods of business valuations.
All the methods of valuation, whether income-based, asset-based, or market-based, are undertaken to arrive at an estimated sales price for your business, based upon the most appropriate methodology. If you have subscribed to an investment bank’s reports or morning meeting comments, you will have noted each publicly traded company has a listed EBITDA multiple – showing the multiple in actual effect based on the prior market closing share price.
So, what factors are considered when calculating an appropriate multiple for your business? Quite a few! Some of them are:
The industry you operate in matters as a factor – while valuation methodologies may differ within a given industry, there are some relatively consistent industry factors which will impact your business valuation:
- Does the industry generally operate at a low or high profit margin? High-profit-margin industries will generally produce a higher multiple.
- Is the industry cyclical/seasonal and variable year-over-year, or are profits more consistent and stable over months and years? Some seasonality and/or cyclical factors may not impact your multiple, but stability and consistency of revenues are always a good thing.
- What is the growth potential, both for the industry as a whole and your business in particular? For example, wireless technology companies were valued at higher multiples 25 years ago than they are today – when everyone wants a cell phone, and there are only a few service providers, you have a huge market. When everyone already has a cell phone and a service provider, you must go further to make them want a new, improved phone, or to poach other service providers’ customers.
These are only a few examples of the way your particular industry and its risks can affect your valuation. However, even in a risky industry there are ways to minimize the impacts and maximize, to the extent possible, your valuation – see below.
Making sure your business is well-positioned for sale includes paying attention to the following:
- Have a strong management team in place – a team that can run the business quite well without your daily oversight. This is one of the strongest factors involved in making your business attractive to buyers, as you can hand over a smoothly functioning concern which they will have time to learn about, rather than having to step immediately into the shoes of a leader essential to every aspect of the business.
- Whatever your industry, if your business has good growth and earnings potential, that’s a plus – and it’s an even bigger plus if you can demonstrate historical growth as well as a clearly set forth plan for future growth.
- Customer loyalty and retention – high turnover of customers sets off alarm bells, while repeat business (especially when added to an increasing clientele) makes for better valuation multiples.
- As much as you want to avoid your business being over-dependent on you, you also don’t want your revenue over-concentrated in one or two big customers – that’s another red flag. Diversity of revenue sources will always look better to potential buyers.
These are only some of the factors which can impact the way that your business is valued.
If you are even considering a potential sale of your business, please reach out to our Transaction Advisors for guidance – we can help you through every stage of the process.
Please click here to email us directly – we are here to help you.
Until next time –