About Valuations
In understanding and interpreting the "value" of a business, it is important to recognise that there are many different "types" and "levels" of value. The most common methods involves the estimation of "fair market value on a going concern basis" for the entire company, e.g. a 100% interest in the subject equity or assets/enterprise.
When valuing the entire company (100% control interest), it is necessary to distinguish between the value of "assets" (asset deal) and the value of "equity" (stock deal).
A variety of factors will determine the chosen mode of sale, with buyer and seller negotiating price and an array of other "terms and conditions" including the type of sale.
When valuing the entire company (100% control interest), it is necessary to distinguish between the value of "assets" (asset deal) and the value of "equity" (stock deal).
A variety of factors will determine the chosen mode of sale, with buyer and seller negotiating price and an array of other "terms and conditions" including the type of sale.
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Fair Market Value
(International Glossary of Business Valuation Terms) The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. |
Going Concern
An ongoing operating business enterprise. Liquidation Value
The net amount that would be realised if the business is terminated and the assets are sold piecemeal. liquidation can be either "orderly" or "forced" |
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The "asset sale" value will always differ from the "stock sale" value due to the specific group of assets and liabilities that are included or excluded in each format.
In determining which estimations of value are of most relevance to the business owner, the reason behind the valuation will typically address this question. Business brokers hired to assist buyers and owners most commonly value businesses under the "asset sale" method through multiples of discretionary earnings while valuations for divorce or estate taxes will be based primarily on the "equity sale" method. |
The majority of small private firms are sold as asset sales while the majority of middle market transactions involve the sale of equity. |
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The general differences between the asset and equity transaction structure are:
Asset Sale (Asset Value) Includes ONLY inventory/supplies, fixed assets and all intangible assets. Excludes all liquid financial assets and all liabilities. Buyer operates from newly formed legal entity. Equity Sale (Equity Value) Includes the assets listed above PLUS liquid financial assets LESS all liabilities. Involves the full transfer of the legal entity including all account balances and current tax attributes. Naturally, the "value" associated with these two distinct transactions can be substantially different. |
ASSET SALE The seller keeps the cash and receivables but delivers the business free and clear of all debt. EQUITY SALE The buyer is acquiring ALL of the assets and liabilities, on and off the balance sheet. |
In the real world, there are many variations on these basic structures, e.g. an asset sale might include accounts receivable or an equity sale might exclude long term debt, etc. The values provided in this report are stated in terms of the baseline case as defined above. They are both “fair market value on a going concern basis” estimates, but one reflects the asset sale and one reflects the equity sale.
Enterprise Value
In middle-market transactions, it is also helpful to distinguish between “equity value” and “enterprise value”. Enterprise value reflects the firm’s value as a functioning entity and it is helpful in that it facilitates the comparison of companies with varying levels of debt.
Enterprise Value
In middle-market transactions, it is also helpful to distinguish between “equity value” and “enterprise value”. Enterprise value reflects the firm’s value as a functioning entity and it is helpful in that it facilitates the comparison of companies with varying levels of debt.
Valuations - what is a company worth?
The process of valuing a company can be a confusing one and often emotionally charged. Aspirational values and actual values are rarely the same.
Valuation is also based on expected future performance, not just past performance and involves:
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The most important element of a successful M&A transaction is the correct valuation/deal price. |
Some of the factors that affect your business valuation
Financial Performance
Often a little financial house keeping is in order to facilitate a business sale.
Growth Potential
A professional investor will buy your business with a view to future growth.
Suppliers, Customers and Employees
Is the business overly reliant on a supplier, customer or employee?
Cash Flow
Can you reduce the amount of capital a potential buyer will need to keep invested the business to cover operating costs?
Recurring Revenue
Businesses with recurring revenue are typically more valuable and sought after.
Competitive Advantage
Can your business maintain a competitive advantage over your competition?
Customer Satisfaction
Can you demonstrate customer satisfaction to a potential buyer?
Management Structure
To be valuable to an acquirer, your business must be able to continue to grow without you.
Often a little financial house keeping is in order to facilitate a business sale.
Growth Potential
A professional investor will buy your business with a view to future growth.
Suppliers, Customers and Employees
Is the business overly reliant on a supplier, customer or employee?
Cash Flow
Can you reduce the amount of capital a potential buyer will need to keep invested the business to cover operating costs?
Recurring Revenue
Businesses with recurring revenue are typically more valuable and sought after.
Competitive Advantage
Can your business maintain a competitive advantage over your competition?
Customer Satisfaction
Can you demonstrate customer satisfaction to a potential buyer?
Management Structure
To be valuable to an acquirer, your business must be able to continue to grow without you.
Valuation is an art and a science
Get in touch with us to discuss organising a valuation for your business.
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FREE BUSINESS VALUATION TOOL
How much is your business worth?
Our business valuation tool will provide you with a rough guide to the valuation of your business. It’s an indication of what you can expect rather than an accurate valuation, but it’s a good starting point if you’re considering selling.
Our business valuation tool will provide you with a rough guide to the valuation of your business. It’s an indication of what you can expect rather than an accurate valuation, but it’s a good starting point if you’re considering selling.
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