Simple question, complicated answer!
Firstly, don’t place too much credence with the many agents keen to sign you up by offering “Free valuations” and a promise of a waiting list of willing buyers!
The truth is that there are many factors that impact the valuation of a business – firstly there are at least 7 different acknowledged ways to value a business from the common EBITDA model, the ROI model, along with Cash Flow valuation and Revenue Multiplier – all will deliver a different valuation.
Additionally, along with the way it is calculated the value of a business will also be dictated by many factors – Ultimately, it will be determined by what someone will pay for it and on what terms.
Let’s take EBITDA as an example which is a calculation based usually on an average of the last three years profit or – Earnings Before Interest, Tax, Depreciation & Amortisation and is widely seen as a measure of how the Company can generate cash.
Once a figure is calculated the Company value is then dictated by a multiple of this EBITDA taking an average of the last 3 years,
This multiple is then also affected by how well the Company has been run and what we here at NIAGroup call “Saleability Factors”
There are 15 critical factors in all covering Reputation, Potential, Maintenance, Performance & Risk, these will all impact the valuation and the buyer’s willingness to pay more or indeed, less for your business.
A responsible buyer will look at every aspect of your business during original negotiations and the due diligence and the following all have the potential to impact the final valuation.
• People – Quality & capability.
• Profitability
• Growth Potential
• Sustainability
• Transferable value
• Marketplace
• Eye of the Beholder
• Added Value
• Cross selling opportunity
• New Skills
• New client base
• Economies of scale
• Supply & demand
• Synergy with other owned businesses
Additional factors dependent on buyer’s criteria could also include:
Primarily:
• Cash generation
• Equity retained
• Management team
• Market sector
• Product or service provider
• Full or part sale
Multiple will also be influenced by:
• Future value
• Market position
• Added value
• Uniqueness
• Reputation and longevity
• Gap in the market
This hopefully demonstrates that every acquisition is unique, and the valuation based on many aspects of the business and demands of the vendor and buyer. It also demonstrate that anyone suggesting they can reach an accurate valuation on receipt of a few basic figures is misleading you!
Here at NIAGroup we are happy to provide an accurate indication of the value of your business using unique software that delivers results from several valuation techniques to ensure a true EBITDA valuation. Ultimately, the sales value of your business will depend on the multiple applied to the EBITDA, but a rule of thumb guide would be between 3 to 5 times EBITDA. For example, a Company with an EBITDA of £500K could expect to sell, for between £1.5M to £2.5M depending on the negative and positive influences detailed above.
We are also happy to forward a document to help you understand the fifteen key value drivers that will increase the value of your business and a “Saleability Test” to illustrate how you currently rate, just ask.
*Adjusted EBITDA is the Earnings before interest, tax, depreciation, and amortization figure adjusted to account for costs likely to be incurred by new owners not already shown in accounts (Wages needed to replace outgoing MD) and the add back of costs not incurred by new owners (Dividends and other personal expenses)
Note:
© David Lee – NIAGroup
E: David@niagroup.co.uk M: 07799 300 200