business valuation spectrum

The Business Valuation Spectrum

If I am considering selling my company how do I approach valuation? My business has value. Maximizing that value is the goal of every business owner when they decide it’s time to sell. How does a seller get comfortable with the value a buyer is willing to pay if s/he isn’t experienced in M&A, business valuation or corporate finance in general? Is it reasonable to decide on a price and hold out for the person willing to pay it to eventually stumble along?

Not if you want to actually be part of a successful deal. Failing to recognize this is one of the most painful mistakes business owners make that not only prevent them from selling, but that in fact often harm the business permanently. This is the importance of the business valuation spectrum: there are a number of approaches to business valuation.

If you can’t name your price, but you see strong value all over the place, how do you increase your business’ value in the eyes of a buyer? Aren’t they going to look at your balance sheet, then offer up a multiple of projected revenue?

How to Realize the Maximum Value of Your Business

“What is the true value of my business?” is a question I am often asked. Because every business is unique, there’s no simple formula for determining value. The valuation process involves extensive finance, analytics, market research and competitive analysis. And it takes a buyer willing to pay it. It’s okay to have a number in mind. But you must be able to justify it. How?

You need buyers to share your vision of a successful future

The point is to tell buyers what your view of the future looks like with fully realized synergies created by a deal, with your business under their leadership. You need to demonstrate all of the unique value you and your team have carefully built over the years that establishes your business as a real player in your industry. You need to tell them how the differentiation your market position and strategy benefits you today and how it will work tomorrow. You need to get them to see your business the way you see it – they need to share your vision that your business plus theirs creates real synergistic value – and you need to be credible. You need to get buy-in that the whole is indeed greater than the sum of the parts. And they will tell you what that vision is worth.

This is how to maximize the value of your business in an M&A sale. Buyers that share your vision will present premium valuations, while everyone else won’t – they will gravitate to the low end of the spectrum. After all, isn’t book value the value? It’s that simple. The problem is you don’t know who these people will be before you start the process. It’s also unlikely you know how to get them to share your vision. It’s complicated and time consuming. And it might never happen.

For serious sellers with good reasons to sell and realistic value expectations, go for it. But don’t go blind. Get an M&A adviser that knows what they are doing, who has experience and knows how to get buyers to share your vision. Get an M&A adviser who knows how to write a great book. That’s right…a book. It’s called a Confidential Information Memorandum (CIM), and it’s the only way to get buyers to share your vision.

You get one shot to do it, so you better make it your best shot

I can’t underestimate the importance of having a really well written CIM, and a really well managed M&A process. Anything short will shave value off your deal.

This requires in-depth market research to determine reasonable assumptions regarding revenue and profitability trends, growth rates and other factors pertinent to your specific business and industry. You’ll need to adjust historical financial statements and build realistic financial projections.

Identify intangible assets – attributes that contribute significantly to your company’s value but aren’t necessarily represented in the financial statements. For many companies these may include market share characteristics, favorable vendor and customer contracts, geographic and competitive advantages, strong repeat business – the list goes on and on. Use all of these elements – adjusted historical financials, intangibles and financial projections – to support a valuation range that informed buyers likely would be willing to pay for your business.

Valuation can be affected dramatically by many non-financial factors

The whole is greater than the sum of the parts:

  • Synergies created by combining entities
  • New market share potential
  • Brand recognition and reputation
  • Quality and depth of management team
  • Future viability of tangible and intangible assets

Realizing the maximum value of your business will only be achieved by seeking a variety of qualified buyers. Prudent business owners look beyond the immediate and seek the largest possible pool of strategic buyers who may be willing to pay a premium for the synergies presented by a positive outlook on the future potential of the company under the direction of the buyer – not just its assets or historical earnings.

Using an adviser can lead to a better deal with a more efficient and effective process, higher valuation and a greater probability of success.


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