“I got a call out of the blue last week from someone saying they were interested in buying my business,” opened Rich. “Wasn’t really thinking about selling yet, but if the price was right, I might be open to exiting now. How do I get a realistic idea of what my business is worth?”

“Just a quick question, Rich: when were you thinking about exiting? asks Sarah.  “Realistically, probably not for another 5 years or so,” Rich replied.  “Five years out is certainly not too soon to start looking into the value of your business,” Sarah continued.  “You’ll probably learn that there are things you can do that will increase the value of your business, some of which could take years to implement.   So even if the caller is not serious, or you’re not ready right now, I would encourage you to continue down this path of determining what your business is worth now and what are the factors that perhaps you could improve to increase the value.” 

Peter jumped in, “I get calls like this regularly, maybe 3 – 4 times per year.  Oftentimes it’s some broker who really doesn’t have an interested buyer … it’s just a line they use to see how interested you are in selling.  However, a couple of times I’ve gotten a call directly from the CEO of a company in my industry; one said they were interested in expanding into our market; another said they thought our products would be a strategic fit with their product line.  I took those calls a lot more seriously.  But I agree with Sarah – it’s certainly not too soon to really get into this topic.” 

“We’re an ESOP (Employee Stock Ownership Plan) company”, chimed in Cindy.  “We have to complete a company valuation every year, so we can put a price on our stock shares.  We hire a firm every year to complete the valuation.  There are valuation methodologies that really only apply to public companies, like market cap.   We’ve always used a method based on  a multiple of earnings, typically EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).  We used this one small firm for years but had to change firms when the partners retired.  We did a search and selected a firm that agreed with the multiple of EBITDA method, but felt our previous valuations were too conservative, too weighted by our earnings history.  They thought our future projected earnings should have more weight.  They came up with a valuation much higher than we had in the past several years; this caused us real problems.  Was our company suddenly worth significantly more than it had been, even though we really hadn’t changed our strategy or service offering?  It didn’t make sense to us … of course, we are fiscally conservative by nature.  Maybe the higher valuation would be useful if we were trying to sell; but we were just trying to set our stock price to accurately represent what each employee’s stock options were worth.”

“I was involved in the sale of a public company where I was an exec,” started Don.  “Our CEO believed in setting very aggressive annual financial goals upon which our bonuses were based.  These projections were used to determine the valuation of our company, which the buyers accepted.  They agreed to a purchase price that required meeting these aggressive goals to justify the price.  It was risky.  Unfortunately, they had to declare Ch. 11 about four years later, when the actual revenues fell far short of the projections and they were unable to service the debt.  Of course, the exiting CEO thought he was quite smart, because he walked away with $13M!  I guess if you’re an unscrupulous seller, you can create aggressive projections and argue your company’s value should be based on them.”

“Back to your original question,” interjected James, “you need to get someone to help with determining the value.  The most common method is a multiple of EBITDA; but there are others.  Using comps can be helpful; but finding truly relevant comps can be elusive.  Using comps is more appropriate with public companies where the value is primarily based on the stock price; but with privately held companies it’s pretty difficult to find a comparable privately held company.  There are also asset-based valuations, which are useful when the company has significant tangible assets and future cash flows can be ignored, but that approach is most commonly used for a liquidation / worst case scenario sales … which is the opposite of what you want!  For your company, I would guess the EBITDA multiple would be 3 – 5x.  You can try to base the price on future projections, but a conservative buyer will want to base the price on the most recent history … last 3 – 5 years.  If you’re going to argue to include the projections, you’ll need to have a fairly detailed business plan showing how the projections will be achieved.  Ideally it’s a plan that is a couple years old and you can show how you’ve exceeded the projections the first two years.

“Back to my earlier comment about other factors,” noted Sarah, “there are other things that buyers will look at besides just EBITDA.  Obviously, anything you can do to increase your profitability will increase the value of your company, so work on that first.  But buyers will look at other factors like how reliant on your daily presence is the company; how will the company do when you’re gone?  Factors like having SOPs (Standard Operating Procedures), the company culture, effective leadership beyond you, your market & competitive position (any new competitors about to eat your lunch?!), etc. will all go into a buyer’s opinion of the value of your company.  At the end of the day, your company is only worth what someone is willing to pay for it!”

“Truer words were never spoken,” concluded Cindy.

“Here’s my take-away,” responded Rich: “fix everything that’s wrong with my company so that it will operate without me and it will be worth a lot more!  Hmmm, If I do all that, I may not want to sell!”

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If you’ve ever wondered what you could learn from your peers, found yourself feeling a bit lonely at the top and/or wanting to get feedback / confirmation from trusted colleagues, yet had no inner circle of trusted confidantes to turn to, this is your chance to give Inner Circle CEO Peer Groups a try.

MONTHLY POLL

When comparing your company to your competition and other companies in your industry, which of the following factors would you use to argue that your multiple should be higher than the others:

• Our above average revenue & profitability
• Our growth potential
• Our superior competitive position
• The quality of our management team & workforce
• Our cash flow & financial health

You can view the results of this poll next week and see how your answer compares to others.

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