What Is My Business Worth?

Knowing the value of your company may prove very useful for many reasons. Are you considering selling your business? Are you considering making an acquisition? Are you considering refinancing or recapitalizing your business? Are you faced with estate planning? Or do you need some advice on structuring a shareholder agreement?

A business valuation can assist in increasing shareholder value, and help clarify the company’s main value drivers, the required rate of return the company’s debt holders and shareholders, and whether the company is generating profits in excess of the required return of the company’s debt holders and shareholders.

In some cases, it’s possible for you to value the business on your own. However, many people choose to engage a professional business valuator, which provides them with an independent, unbiased and objective value for their business.

Just remember, no matter what, at the end of the day, a company is ultimately worth what somebody is prepared to pay for it.

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Value vs. Price

If you are considering selling your business or making an acquisition, it is vital to recognize there are almost always significant differences between value and price.

Purchasers and vendors may have different knowledge, negotiating abilities and financial strengths, but there may also be emotional considerations that override objective analysis, for example with family businesses.

Special interest purchasers – strategic purchasers who expect to enjoy post-acquisition net economic value added by combining the acquired business with their own – may be prepared to pay more than intrinsic value.

Even the structure of how the purchase price is paid can have a big impact on overall price.

Three Approaches to Value

Valuing a business is not an exact science. It requires you to look beyond the numbers to determine what drives the value and what exposures there are to risk. This demands a thorough knowledge of all facets of your business.

Professional business valuators usually use three approaches to determine value:

- Asset-based approach;

- Going concern or returns-based approach (based on some measure of earnings or cash flow); and

- Market-based approach (comparable company analysis and comparable transaction analysis).

In many cases, the value of a business is estimated by applying a multiple to some measure of its earnings or cash flow. The most popular approach in this regard is the multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) methodology.

Because of the ease of its use, valuation multiples, particularly multiples of EBITDA, are often used by buyers and sellers when negotiating a transaction. This is the approach typically adopted by corporate acquirers.