Imagine if a big shot investor walked in the door today and offered to buy your company. How would you respond? Would you blindly tell her to make you an offer and then consider whether it’s enough for you to retire? Or is your business valuation clear in your mind, such that you could seriously start talking numbers?
If you don’t know how to value your business, you risk being taken advantage of, even if the amount an investor offers sounds really good to you. One thing is for sure, the numbers don’t lie, so it’s important to know them or to at least know how to access them when you need to.
Whether you’re considering selling your business in the near future or simply looking for ways to increase your value, figuring out your current business valuation is the place to start. So, what do you need to know?
How to determine a business valuation:
If you are even a tiny bit familiar with the world of corporate finance, it will come as no surprise that there are several ways to value a business. There is a plethora of valuation metrics out there: EV/EBITDA, P/E, PEG.
Your finance team can help you decide the right valuation metrics for your business. However, basic business metrics are the building blocks of all valuation. Here is a short list of the metrics that will inform your business valuation:
- The value of the business’s assets. Included here is whatever the business owns: any buildings, equipment, product inventory, patents, logos, and cash on hand. Your balance sheet should tell you the value of your assets. An investor or potential acquirer will ask to see your balance sheet – and the rest of your financial statements. Be ready.
- Revenue. Many investors use revenue as a quick assessment of a firm’s value. A quick method they might use to estimate the value is to employ a revenue multiple. A revenue multiple is simply a calculation of the offered valuation divided by one year of revenue. For example, if you have $100M in annual revenue and your valuation is $1B, your revenue multiple is 10x. Benchmark multiples vary by industry. You should ask your finance team to research typical sales multiples in your industry.
- Earnings. Of course, revenue doesn’t equal profits. Amazon is the most famous example of this. Despite revenues being through the roof, they have only posted a handful of profitable quarters. This is why earnings matter and why multiples of earnings may be a better way to estimate a business’s valuation.
- Cash-flow analysis. Finally, revenue and earnings valuation are only a good way to value a company if you can prove they will remain steady. Changes in competition, supplier prices, and industry trends all affect earnings. It’s important to reflect these in your cash-flow projections to demonstrate the rationality of your narrative.
- Nonfinancial considerations. The above techniques will help you value the financial side of your business. But, as we know, nonfinancial considerations also come into play. Any research you can do into potential investors’ portfolio, could help you get a better valuation. For instance, does the investor own other businesses in your location? Does she own similar businesses? Has she put the word out that she has always dreamed of owning a business like yours? You can use any of these intangibles to your advantage to influence the sale.
Beyond business valuation to selling strategy.
Once you know your numbers cold and you’re ready to sell, it’s time to come up with a strategy. Without taking the time to strategize, you risk letting fatigue or anxiety influence your decision. So make sure to take a deep breath and hold on tight to your strategy.
Whenever I advise clients dealing with this type of transformation I recommend the following:
1. Take the time to get ready. Beyond getting your accounting, contracts, and legal documents in order (which you should absolutely do!), also consider how you talk about your business.
Do you have a clear, concise, and impactful elevator pitch? At this stage in the game, chances are good that you have this. But it’s good to remember that first impressions count now as much as when you’re first starting out.
If you can you introduce your business such that anyone can understand it, the first impression is that you have your act together and the rest of your business operations are equally well run. This is good!
Can you simply and easily explain your business model, competitive positioning, and prospects? Take the time to review your business model, market dynamics, and business pipeline. Look for trends—past and future. Again, the clearer your business model and prospects the easier it will be for a prospective acquirer to understand the current and future potential of your business and the better your opportunity to improve your valuation.
2. Look from the outside in. I often see business owners that are so caught up in running their businesses that they cannot see how their businesses look through the eyes of their customers, business partners, and—yes, valuation experts.
It can help to ask for external perspectives. Ask your employees (especially those who are customer facing), customers, business partners, community partners, etc. about their perspective on your business. Do not get defensive. This is an intelligence gathering exercise, think of it as nothing more or less.
Use the information gathered to help shape your clear and concise business messaging (see above).
If there are differences between the feedback and your perception (or your desired perception) of the business, consider a gap analysis to address any fundamental misperceptions. Here are some easy-to-use templates for getting started with a gap analysis.
3. Consider your promotion strategy. You wouldn’t sell your house without clearing the clutter, giving it a fresh coat of paint, and engaging a crackerjack realtor, right? Business valuations are similar.
Review your external face to the market (e.g., website, sales materials, business cards). Are they dated? Do they reflect your business in a positive light? Take the time to make your promotional materials work for you. Yes, this will be an added expense, but again, think of it like making cosmetic improvements to your home to get you to a higher price point.
If you have time, engage in a promotional strategy to raise the visibility of your firm and demonstrate market leadership and awareness. This won’t apply in the case where an investor walks in ready to write you a check, but that’s also not the most likely scenario.
By elevating public perception of your business, you improve your market positioning, customer awareness, and you may also increase your new business pipeline—all important factors as you enter into a business valuation.
The above is really just to get you started down the path of valuing your business. For a more comprehensive guide (complete with helpful valuation worksheets), see Jeff White’s How To Guide. Audacia’s CEO, Katy Herr was quoted in the article too!
And if all of this sounds completely overwhelming, take a step back and take a deep breath. Finding a business valuation that not only reflects your sweat equity, but also sells investors on your vision requires patience. Honor your hard work by taking the time you need.
Finding an expert who has been through it can make a big difference in your confidence level too. At Audacia Strategies, we can work with you to get your numbers straight and weave them into a narrative that reflects your complete business valuation. Let’s discuss your vision!
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