When determining if you are ready to sell your company, it is important to think of the market value of your company. There are a number of ways to determine the market value of your company.
The most common ways to determine the market value of your company are:
- Market Multiples
- Cash Flow
It is also important to understand that there are other aspects to consider when assessing the value of your business. You need to look past financial calculations and understand the value of your business based on potential strategic value. What value does your company provide to a potential acquirer? These added-values are considered synergies.
Synergies can help maximize your business’s market value. Synergies are reflected in the market value of your company. Let’s dive in and understand a little bit more how to assess the value of a company.
The Value of Your Assets
- Simply add up the value of all your assets and subtract any debts or liabilities on the company’s books. This value provides a starting point for determining the value of the business. However, the business most likely is worth more than its net assets. As such, we need to look into the revenue and earning potential of the company.
- A revenue multiple is used to compare the annual sales of the company against similar companies based on size, geography, industry, etc. Depending on the size of the company, you may be looking at public or private company multiples. For example, let’s say your company is Qualtrics. Qualtrics was acquired by SAP for $8 billion. Based on Qualtrics year-to-date revenue of $372 million as of Q3, the implied revenue multiple would be 20x. Tech company’s like Qualtrics are commonly valued using a revenue multiple rather than an EBITDA multiple as described below.
- A more relevant measure for your company is EBITDA, which stands for Earnings Before Interest, Tax, Depreciation and Amortization. By utilizing an accountant or accounting software, you can produce this figure. If your company’s EBITDA is around $500,000 and you operate as a general contractor, a 2-3x EBITDA multiple would be applied. You are looking at a $1.5 million business. The average EBITDA multiple per industry varies and there are other factors that may increase or decrease the selected multiple.
Cash Flow Analysis
- The discounted cash flow analysis observes the annual cash flows of a business over a projected period. A discount rate is then applied to the future cash flows in order to determine what the future cash flow would be worth today. Typically, the cash flow analysis is used as support for the market value determined by revenue or EBITDA multiples.
Developing an understanding of the value of your business today can help you assess areas of weakness and strength. However, the typical business valuation is just a sheet of paper, detailing the value of your business. Inquire and work with your business valuation professional to construct company goals, etc. Identify those added values and execute.