Beware the Benchmark Valuation

Many financial advisors or owners like to value a company using back of the napkin math, but it’s not always reliable. For example a company with $3 million in EBITDA, might, as a general rule of thumb, sell at a 4x to 6x multiple. In other words, it might sell for $12 million to $18 million in an average market.

If the company doesn’t have any outstanding qualities (i.e., no management team, lumpy sales, no recurring revenue), accepting an unsolicited offer in this value range could make sense. But if the business does have a number of value drivers, you’ll typically get better results on the open market.

Check before you accept. By definition not every company is worth more than the average. If you get an unsolicited offer, get a second opinion before you accept. Ideally, you would talk to an M&A firm that’s represented businesses of your size.???

If it’s a reputable firm and they see it’s a good offer, they’ll tell you. Sometimes unsolicited offers can make the most sense for buyer and seller. But don’t let a buyer pressure you into moving too fast. Give yourself time to get more information.??Plus in many instances unsolicited offers come to the table and promise one thing and as the process moves along change the originally negotiated terms.?Many times it is wise to have an advisor assist you through the process to make sure the terms are not changed or to make the buyer understand that other buyers will be sought if the terms are changed.?Knowing what your business is worth and the current market conditions will help you feel confident during the negotiating process.

Know your business’s value. Pulling a multiple on EBITDA is the most simplistic form of doing a valuation. But it doesn’t tell the whole story. It doesn’t account for standout business qualities that drive up value, and it doesn’t account for current market dynamics.??

If you own a business, it’s a good idea to get an estimate of value every few years. Knowing what your business is worth (and what’s behind that value), can help inform your growth plans. Alternately, you may also find the business is worth more than you expected – and accelerate your exit plans.??