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What is Your Company Really Worth?
When selling your company, only one value matters
by Mark Jordan
April 9, 2009
When business advisors speak with business owners about selling their company, invariably their
first questions is, "What is my company worth?" Unfortunately, most of them have already been
inundated with misinformation on value, and have all but accepted the "rule of thumb" as the
primary means of establishing value.
The rule of thumb can take on many variations, but the most common is the multiple of
earnings. Books, seminars and articles contain the most common range of multiples. Some offer
general multiples that apply to all industries while others offer multiples for specific
industries.
Rules of thumb are at best a weak guess of value. The variables that contribute to value can
vary greatly from company to company rendering the rule of thumb inaccurate. When it comes time to
sell your company, the only value that matters is fair market value. The obvious challenge is that
fair market value by definition can only be determined at closing when money changes hands. The
closing is the moment where a willing buyer and willing seller have established fair market value.
So, how do you project fair market value before the closing? The first step is to acknowledge
the best you can do is provide an educated guess. The second step is to establish what methods are
available to make your educated guess. The last step is determining the purpose of your guess.
Common methods
Finding similar companies, or comparables, is a common starting point. You identify enough
similar companies that have sold recently in an effort to establish commonality with your company
in this method. This is relatively easy to do in the public markets, but very difficult to
accomplish in the small and medium size market place. Some challenges presented with this approach
are:
* Business owners typically do not report the details of private
transactions
* When reporting does occur, it is quite common to over or under report
key details
* Rarely do you have an insider look at the true standing of the
comparable company
* Key details are often left out
Another approach is to calculate a "reasonable" or "fair" multiple. Notwithstanding, the
problem of agreeing on what is reasonable or fair, there are many variables that contribute to the
final multiple used in a calculation. A multiple is simply the inverse of the discount rate.
Calculating the discount rate requires such assumptions as equity risk premium, risk premium for
size, and other company specific risk factors.
Polling corporate development people employed by acquisitive companies can provide
interesting insight into the market for companies like yours. There is no shortage of challenges
with this approach including getting accurate information and polling enough candidates to insure
the information is meaningful.
A full-blown appraisal or valuation involves following a specific set of standards or
protocol. You receive a comprehensive work product that looks and feels like it offers a high
degree of confidence in the final value. The reality is the more comprehensive the output is;
valuation professionals must make more assumptions that serve to open more debate with prospective
buyer. Given comprehensive valuations are expensive and buyers certainly are not going to accept
your valuation as the "true" value, many small and medium businesses avoid this process as it
relates to selling a business.
Purpose
Most people contemplating selling a business want to know a range of value they will likely
receive if they bring their company to market. If the realistic range is too low, there is no point
in embarking on the journey unless they are in a situation where they must sell. If the realistic
range is calibrated with their expectations, it makes sense to move forward with a business sale.
To maximize the probability your guess is within a realistic range, consider utilizing a
combination of comparables, multiples and polling corporate development insiders. Comparables and
polling corporate development insiders can act as a starting point with your multiple calculations
acting as a sanity check. Once you have your guess, don't hold on to it too tightly because it is
just that - a guess. Only fair market value matters in the end.
Mark Jordan is managing principal of VERCOR, an investment bank that creates liquidity for
small and middle market business owners. He is the author of four books, including Enhancing Your
Business Value...The Climb to the Top and Selling Your Business the Easy Way.
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