When many business owners consider selling a business in Atlanta, their business’ value should be at the forefront of their thinking. However, most think about a level of profit (EBITDA, Cash Flow, etc.) and then use a multiple to arrive at a market price. This thumbnail method to selling a business can provide an indication of enterprise value (debt plus equity) or an equity value depending on whether the benefit measure is before or after debt. For example, an EBITDA provides a measure of cash flow “available to the firm” or an enterprise value when multiplied by a valuation multiple. On the other hand, Net Income provides a measure of benefits “available to equity holders” and thus a value for equity when multiplied by a valuation multiple.
While somewhat useful, taking a high-level approach to business valuation when selling a business in Atlanta can be a BIG mistake. Every business has a value that is based on a number of factors not just a multiple. Multiples vary in magnitude over time depending on the risks and strengths of the cash flows. Here are a few things to consider among others:
1. Quality – The volatility or the riskiness inherent in earnings drives its quality. One business could have contractual agreements from many customers of its core product or service that make its quality higher than another that has unrelated or one-time events as the basis for its profit. As a buyer or seller of a business, the question to ask your self is: Is the business model sustainable and repeatable to generate consistent profits over time?
2. Predictability – Again, when selling your business, if your business has contractual revenue, for example, the purchaser can feel confident in future cash flows. This lowers the perceived risk and increases the multiple a buyer of a small business might be willing to pay on your business’ earnings or cash flow.
3. Opportunity – A business owner needs to demonstrate to a suitor that his/her business model works and will work going forward in years to come. This will show competence and credibility. A buyer will always have ways for a business to improve so he/she can realize higher return on investment. But most financial buyers want to see some level of integrity in the business model first. Then their opportunity to enhance the business (i.e., uncover value) is more achievable.
4. Synergy – For strategic buyers, opportunity goes even further. If an owner is selling his/her business to a strategic buyer, he/she thinks your business is even more valuable under their control than it is under yours because cost savings and distribution opportunity. They will typically offer a higher value for your company so you as a seller of a business receive some of that benefit as well in the form of a higher price than would be offered by a financial buyer.
5. Barriers to entry – the harder it is to start a business like you’re the more valuable your business will be to potential suitors. When businesses generate large profit margins, other competitors want to come into that marketplace and take as much as they can. Barrier to entry for your business could be your brand, certain regulations, patents, capital intensity, relationships, etc. The more you have the better insulated your margins are from would-be “poachers”
6. Strong management – Management strength lowers because a strong team can take advantage of opportunities and mitigate risks. It can impact a multiple by reducing risk in the business model and hence the risks premiums assigned to it. The higher the risk the lower the multiple a buyer is willing to pay.
Understanding the factors that drive business value can go a long way to helping you think about where your business is today and where you it to be in the future. Call me direct 770-380-2406 to discuss your particular situation.