How to value a business | CapEQ M&A advice | company value

How much is your business worth?

Steve Murphy

Steve Murphy


Share on facebook
Share on twitter
Share on linkedin

How much is your business worth?

At the heart of your business sale journey lies a fundamental question: how much is your company really worth? In this comprehensive blog, we delve into the intricate landscape of M&A, shedding light on the key factors that influence business valuation, including financial health, strategic fit, and scarcity value.

The Intricacies of Business Valuation

Factors affecting business valuation in acquisitions

Financial Health

One of the primary considerations in business valuation is the financial health of the entity. This encompasses various metrics depending on the industry. For instance, a manufacturing company might be evaluated based on net profits and EBITDA, while a consumer-oriented business, such as a pharmacy, would factor in metrics like prescription numbers per month.

Understanding the financial intricacies is crucial, as potential buyers will scrutinize these metrics to gauge the current and future profitability of the business. A holistic assessment involves not only historical financial data but also projections and potential returns on investment.

Strategic Fit

Beyond the numbers, the second key factor influencing business valuation is how well the business fits into the strategic objectives of the potential buyer. This involves an in-depth analysis of the buyer’s needs, market position, and future plans. A business that aligns seamlessly with a buyer’s strategy is perceived as more valuable, emphasizing the importance of timing and context in showcasing its worth.

Strategic fit extends beyond the obvious candidates. To maximize valuation, businesses must cast a wide net, targeting potential buyers contemplating a move into their sector from diverse fields, industries, or even countries.

Scarcity Value

The third pillar of business valuation is scarcity value. This factor goes beyond traditional metrics and focuses on what makes a business unique and indispensable. Scarcity value is boosted by a proprietary product, exceptional management experience, IP ownership, market dominance – or as a platform to consolidate your market around fewer players.

Isolating and promoting scarcity value can significantly enhance a business’s market position and valuation. A unique product or service, like a software program with the potential to unlock a market of billions, places the business in the driver’s seat during negotiations.

Maximizing Business Value

When should I sell my business?

The Role of Advisors

In the complex world of M&A, advisors play a pivotal role in maximizing a business’s value. Their task involves presenting the business favorably in the market, optimizing competitive bidding, and steering away from a fire sale scenario. Advisors focus on highlighting the three key valuation influencers: the overall strength and health of the business, its strategic fit with the buyer, and the unique elements that the buyer desires but doesn’t yet possess (scarcity value).

Research and Due Diligence

Thorough research is the bedrock of successful M&A transactions. Advisors, such as CapEQ, conduct extensive analyses of the business, market dynamics, and potential buyers before arriving at a range of valuations. Without knowledge, experience, and proper research, any valuation attempt would be akin to a wild guess.

The competitive landscape is multifaceted, and attracting multiple bidders requires a deep understanding of the market, competitive forces, and the specific needs of potential buyers. Advisors act as guides, ensuring businesses navigate this intricate terrain with precision.

Beware of False Valuations

As businesses progress along the valuation trail, it’s imperative to be aware of potential pitfalls. True business value is only known upon completing a sale exercise, and valuations for tax or asset purposes may not capture the real worth. Historical valuations are often misleading, as the appeal lies in future potential rather than past glory.

Valuations can also be inflated through wishful thinking or overestimating profit opportunities post-purchase. A realistic assessment of underlying profitability is crucial, focusing on tangible, measurable metrics rather than vague anticipated add-backs.

Selecting the Right Bidder

Choosing the highest bidder is not a one-size-fits-all solution. Businesses need to align with bidders who deliver the desired outcomes, which often extend beyond monetary considerations. Compatibility with values, a positive impact on stakeholders, and a commitment to preserving the existing culture are vital factors in selecting the right bidder.

Valuations can be inflated through wishful thinking. As an industry we have earned a bad reputation for overestimating profit opportunities post-purchase. For example, if a family member within a business draws a large salary in return for very little input, removing such costs tends to be factored in as a future profit opportunity. At CapEQ we look at underlying profitability – not vaguely anticipated add backs.

The final caveat is to avoid the highest bidder, unless they deliver what you really want from the sale. Your preferred outcome is not likely to be restricted to money. You are likely to want the best for your fellow stakeholders, but also management and workforce. If you have spent years building a consistent ethos, you will want to know that your values dovetail with those of the purchaser and that they are not going to destroy livelihoods and the culture you’ve spent years putting in place.

Key takeaways

In the dynamic world of M&A, understanding the key factors influencing business valuation is paramount. Financial health, strategic fit, and scarcity value collectively shape the worth of a business, and navigating this landscape requires strategic planning, thorough research, and the guidance of experienced advisors.

The journey towards maximizing business value is an intricate one, with each step contributing to the overall success of the M&A transaction. While the true value of a business is only revealed upon completion of the sale, businesses equipped with knowledge, foresight, and the right guidance can confidently navigate the complexities of M&A and secure deals that align with their long-term objectives.

Keep Reading