MPL General Counsel Corner – Price is What You Pay, Value is What You Get
Happy Easter, Happy Passover and Happy Sunday to everyone. The next in our M&A process series is valuation. If you are the seller, do you know what your business is worth? If you are the buyer, do you know what you are willing to pay? Business valuation is tough enough in the public spectrum and those companies provide you with information. In the private arena, it can feel like the wild west. However, there are professionals in this space that can certainly provide valuable insight. Below are a few of the methods that are typically employed:
- Asset Method – a simple, yet very objective method where you take the difference between the asset value of a company and its liabilities; this method is good if the true value lies in the assets and not so much in their income generating capabilities (a good example of this would be a purchase of a business because of the equipment, land and/or real estate)
- Income Method – in this method, the value of the company is based on the present value of its discounted future cash flows (i.e., what you think the company can give you in cash over a certain number of years discounted back to today’s dollars; this method is often used for high growth and/or consistent cash flow businesses)
- Market Method – the value of the business is driven by the value paid for comparable companies; multiples (price/sales, price/ebitda) from these transactions are calculated and then applied to your business financials; if you ever talk with someone from private equity, you will hear some version of this method discussed;
Typically, a combination of the methods above will be used by valuation professionals to help you get a sense of the value. Below are some articles that may provide more insight:
- How to Value a Company by Analyzing Its Customers (hbr.org)
- Nine Valuation Mistakes for Business Owners to Avoid – The CPA Journal
- Helping Business Owners Understand Valuation Approaches – The CPA Journal
I would highly recommend that you engage with a professional (CPA, certified business valuation expert, business attorney, business financial advisor) to help you get a sense for the value of a business.
“What a company is worth depends on who wants to buy it.”
Michael Price, value investor
Here are a few Helpful Resource Pages:
- Knowledge Center (eisneramper.com)
- Trout CPA Blog | Tax & Business-Related Topics
- News & Analysis | Littler Mendelson P.C.
- Insights, Analysis & Perspectives for Your Business | RKL LLP (rklcpa.com)
- NFIB Research: Data and Trends Affecting Small Business Owners | NFIB
- The Tax Warrior Chronicles (taxwarriors.com)
As always, please don’t hesitate to email me (James Sanders) (email@example.com), Andy Miller (firstname.lastname@example.org), Christian Miller (email@example.com), Erik Spurlin (firstname.lastname@example.org) or anyone in our office with questions or comments.