Business Valuation

Know your numbers and negotiate from a position of strength

When buying or selling a business Knowing your Numbers is critical. Understanding how value has been created thus far and how it will continue to be created in the future is a must. Comprehending the value drivers of the business allows the buyer/seller to negotiate from a position of strength. Unlike other purchases such as boats and houses, buying or selling a business entails a complex mixture of tangible assets and intangible assets. What makes this business unique? What is the value proposition of the business and how would this be affected after the owners exit the organization? Who are the suppliers? What’s the outlook for the industry that the business operates in? What are the barriers to entry related to the industry? What’s the outlook for cash flow and profitability in the next 5,10,15 years? What are the major threats to the organization? All these question plus some other factors would be considered and baked into the final value of the business.

Measuring Value

Business valuation is an art as much as it is a science. It is a science because of the analytical tools and frameworks utilized to arrive at a number. The most used valuation methods include the Income Approach (DCF), Relative Value (earnings multiple) and the Replacement Cost. The Income Approach and the Relative Value are the most used of the three. Through the Income Approach, value is obtained by discounting expected future cash flows at an appropriate cost of capital, while the Relative Value approach relies on market multiples based on comparable companies.

Combining the analytical frameworks and methods described above with the art of exercising professional judgement and examining companies based on their current and future environment is critical to arrive at an insightful and meaningful valuation.