how-to-determine-the-true-value-of-your-business

Middle-market mergers and acquisitions transactions have increased significantly over the past few years. With increased market strength comes a rise in valuations and the arrival of ideal conditions for business owners to consider selling their business for maximum value.

This may seem like a great time to pull the trigger on a transaction, but according to a recent report from The National Center for the Middle Market, almost half of all sellers struggle to determine the true value of their business. Fortunately, there are several ways that an experienced investment banker can help. From efficient due diligence to a comprehensive understanding of valuation processes, an M&A investment banker can help most businesses discover their market worth.

Start By Determining Your EBITDA

Earnings before interest, taxes, depreciation, and amortization (EBITDA) are part of an equation that displays the approximate cash generation of a business.

The EBITDA method removes several factors from the valuation equation, including:

  • Business taxes;
  • The cost of recovery for fixed business assets; and
  • The impact of capital structure that finances operations.

Once these adjustments are made, the business’ EBITDA valuation multiple is determined and then the projected value can be compared to competitors in its industry that are completing similar sell-side transactions.

Perform A Discounted Cash-Flow (DCF) Analysis

Although a DCF analysis involves a complex formula, it is a great way to determine a business’ future cash-flow. The DCF method examines the current cash-flow of a business, then discounts it for future years with a “net present value” calculation.

Both buyers and sellers can benefit from a DCF analysis because it gives a clear view of a business’ financial future and presents a realistic number when determining the true value.

A Broker Can Help You Organize Business Finances

Preparing for the valuation process is key to uncovering the value your business has accumulated over the years. One of the first steps in selling a business is having organized financial information. This facilitates the initial valuation estimate. You should have the following documents ready for your M&A advisor to review:

  • Tax Returns
  • Tax Filings
  • Licenses
  • Deeds
  • Balance Sheets
  • Profit/Loss Statements (last 3 years)
  • Proprietary Documents

If you’re entering into the sale process with little to no experience, a qualified transaction advisor will be able to help you determine how to prepare for your company’s valuation.

Examine Your Assets

A company’s assets can give an extra boost to its true value. During an M&A transaction, both the tangible and intangible assets of the business will be closely examined.

Tangible Assets

Physical items that add value to a business are called “Tangible Assets.” These assets depreciate over time and their worth is determined by how much value they add to your business, even after the initial loss of value (usually after one year).

Tangible assets are usually:

  • Equipment
  • Buildings and Land
  • Cash
  • Inventory

An experienced M&A advisor in sell-side transactions can help a seller evaluate tangible assets and include the determined value in the overall sale price.

Intangible Assets

Intangible assets are harder to assess in value because they include items like logos, patents, trademarks, and copyrights. These are non-physical items that are considered less liquid because it is harder to determine a price tag for such items.

When the time comes to determine the value of intangible assets, keep in mind that they are amortized, and the value is determined by the asset’s cost over its useful life within a business.

For example, if your business’ reputation started out with a bang, but in recent years has decreased, the value of your reputation as an intangible asset has therefore also decreased.

Get Maximum Value From Your Transaction With Kratos Capital, LLC

Don’t make the mistake of trying to sell your business on your own — you risk leaving great value on the table after the ink dries on your contract. Make your sell-side transaction a lucrative move by putting your business in the hands of our Dallas mergers and acquisitions professionals.

The investment banking advisory team at Kratos Capital is prepared to help you sell for maximum value. Contact us to learn more about our firm and let us become part of your success story.