What's My Business Worth?

It's a question that's easy to ask, but not as easy to answer. As M&A advisors, we hear this question often, and it's a logical way for business owners to start their journey with an Investment Bank.

This article dives into this question, and is an extension of the recent podcast interview I had with Jonathan Brabrand . His episode can be found here - YouTube | Spotify .

But First - September Podcast Review ???

Jamal Hasan - Advanced Treasury Services to Fuel Growth and Mitigate Fraud YouTube | Spotify

Paul Covill - Banking Solutions For Government Contracting Companies YouTube | Spotify

Kassi O'Brien, MBA - Business Strategies To Reduce Healthcare Expenses YouTube | Spotify

Patrick Morin - What You Should Think About Before Selling Your Business YouTube | Spotify

Jonathan Brabrand - What's My Business Worth? Business Valuation Insights YouTube | Spotify

Meet Jonathan Brabrand

Before we dive into our conversation, let's introduce Jonathan. He has dedicated his entire 25-year career to helping business owners prepare for and execute successful exits. As the author of "The $100 Million Exit" Jonathan's expertise shines through on a daily basis as a member of the Transact Capital team.

The Burning Question: What's My Business Worth?

Valuing a public company is straightforward – you can check its stock price daily and see its "exact" valuation based on what the market is saying. However, valuing a private business isn't nearly as easy. The fact is, there isn't a simple equation, or even a set of equations, that can accurately tell you what your business is worth. Instead, the process of valuing a private company involves a blend of art and science. To being with, let's look at some of the science-based approaches we can take:

1. Discounted Cash Flow Analysis: Assessing the risk-adjusted stream of the business's future cash flow.
2. Public Market Comparisons: Examining how publicly traded companies in the same sector are valued.
3. LBO Analysis: A Leveraged Buyout analysis estimates the maximum value a financial buyer can pay for a target company. It is similar to a DCF analysis, but with a few differences.
4. Comparable Transactions: Much like what you are used to with residential real estate, we can look at how similar companies that have recently sold were valued.

The above are all examples of the "science" aspect of a valuation, as they all involve specific and identifiable data plugged into various valuation models. These examples are where you will often hear the term "multiple" thrown around. It is usually heard like this in conversations, "I'd value your company at an EBITDA multiple of 5x", or something similar. Below is an example of industry historical data from 2022, aggregated by Pepperdine University.

The greatest benefit of using the above approaches to business valuations is SPEED. Almost anyone can plug in data to spit out a value; however, these approaches miss all of the "art" that goes into a business valuation.

And as a business owner looking to maximize your exit, you aren't going to want to leave anything on the table when it comes to the value of your business.

Boosting Business Value: Controlling the ART of business valuation?

Business owners often focus on the "science"; however, they sometimes overlook the "art" of business valuation. The art of business valuations can be best described as looking at your company through the lens of risk, or the perceived risk that a potential buyer would be taking on if they bought your company. Reducing this perceived risk associated with your business is a crucial factor in boosting your valuation.

Key ways to reduce risk include:

1. Depth of Management: Ensure the business isn't overly reliant on a single individual (hint - YOU). How easy are you, as the owner, able to step away? And how easy would it be for a new owner to step in and take over? Think of the last vacation you took. How long were you able to leave the company? Were you checking in constantly or were you really able to disconnect? Buyers favor companies that can operate seamlessly with minimal owner intervention. Develop a capable management team to ensure continuity.
2. Quality of Financial Reports: Start early in ensuring your financial records are accurate, transparent, and well-organized. Clean financials inspire buyer confidence and expedite the due diligence process. Think of this from a "risk" perspective. Company prepared financials, even if they are 100% accurate, will inherently be viewed as risker compared to CPA prepared or audited financials.
3. Asset or a Stock Sale: You need to have a clear understanding of each of these, and how a buyer will perceive "risk" with either. An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner's shares of a corporation. Beyond differences in potential liability risk, these will also have different tax implications for you and the buyer to consider.
4. Recurring Revenue: Asses your revenue streams. How much of this is structured as recurring, tied to specific contracts or agreements for specific durations? Having recurring revenue is valued higher than just project-based/one-off revenue streams. Also, take a look at your contracts. Are these written in a way that they can be transferred to a new owner?
5. Customer Diversification: Avoid relying heavily on one or a few major clients. You ideally don't want any one client counting for more than 20% of your total revenue. If you have a customer concentration, can you explore sales methods or marketing campaigns in the months leading up to going to market to expand and diversify your customer base? This can also apply to your vendors. Think, do you have multiple vendor resources, or are you 100% dependent on one vendor? What if they went out of business?
6. Business Processes: How well are all the functions of your business documented? Everything that everyone does while at work needs to be documented. Think again from the buyer's point-of-view. How easy is it for them to show up on day one and instantly know how to run the business? Don't just assume that your skilled, trained, and professional workforce will always be there. A buyer won't want to assume anything.
7. Growth Prospects: Develop a rolling two-year growth plan that outlines your targeted growth rate and actionable steps to achieve it. This needs to be updated quarterly. Think of this document as the blueprint a future buyer could show up on day one with and start executing. Providing a roadmap to future growth and success reduces risk for the buyer.

Business owners should step back and consider how an outside investor might view their business. Identifying and mitigating perceived risks can significantly increase business value.

External Factors: What about things we can't control?

External factors, such as economic conditions and industry trends, can significantly impact the timing and success of your business exit. This ultimately impacts your valuation. Let's break these down into three factors to consider. One general rule of thumb we recommend, if two of these three areas are "strong", then it should be a good time to consider moving forward with your business exit.

1. M&A Market Activity: Sell when the M&A market is active, like selling a house in a hot real estate market. We can provide owners with current insights into the M&A market.
2. Industry Trends: Sell when your industry is in an upswing rather than when it's out of favor.
3. Business Growth Stage: Aim to sell in the early innings of your growth, not when the business plateaus. All businesses have periods of growth, plateaus, and even downward periods. Know where you are, and plan accordingly.

Remember that buyers are interested in future performance, not just past successes. Having growth potential beyond the sale is crucial to attracting buyers and maximizing your exit.

Parting Words from Jonathan

As I wrapped up our podcast conversation, I asked Jonathan for his top piece of advice for business owners considering an exit. He emphasized the importance of proactively planning for your exit and never putting off the necessary work.

Whether you're just starting your business or have been running it for decades, always think about your exit strategy. Focus on building value in your business and reducing perceived risks.

Thank you, Jonathan, for sharing your insights, and thank you, LinkedIn community, for joining us for this topic and conversation. If you have questions or want to continue the discussion, feel free to comment below.