Myths of Private Company M&A
Formulas will provide an accurate value for a business
How is a business valued?
- The initial step to selling a business involves a thorough and
accurate business assessment.
- Common methods for valuing a business include public market
comparable analysis, identifying precedent M&A transactions,
discounted cash flow analysis, book or asset based valuation
approaches and applying multiples to revenue, EBITDA or net
income.
- Many formulas and "rules of thumb" have been developed to arrive
at a "ballpark" estimation of value, but it takes seasoned expertise to
look beyond mere formulas and determine a real measure of value.
Relying exclusively on valuation formulas is not appropriate
- Applying historical financial data to assess value will often result in
an inaccurate valuation. It is common for private businesses to
report minimal profits on tax returns. While this is smart for income
tax purposes, using such figures for valuation purposes will
underestimate the value of the business. Accurately "recasting"
financial statements is therefore critical.
- Developing defensible financial projections is also paramount to
maximizing value. After all, a prospective buyer is paying for the
future cash flows of a business, not past performance.
Comments from the US government about "formulas"
- The US government recognizes the inherent shortcomings of
valuation formulas as evidenced by the following excerpts:
- IRS Revenue Ruling 59-60: "No formula can be devised that will be
generally applicable to the multitude of different valuation issues…"
- IRS Revenue Ruling 80-213: "Valuation of securities is, in essence,
a prophecy as to the future and must be based on facts available
and the prospective economic conditions as of the valuation date."
- California Court of Appeals in 142 Cal. App. 3d874 (1983): "We
recognize the determination of the value of infrequently sold,
unlisted, closely held stock is a difficult legal problem…the cases
illustrate there is no one applicable formula that may be properly
applied to the myriad factual situations calling for a valuation of
closely held stock."
Business valuation is more an art than a science
- Business valuation is not a "standard" process. Value is driven by a
wide range of variables, both external and internal, including
economic conditions, industry dynamics, stock market conditions,
company specific issues, buyer motivations, competition and the
strategic assets of a business.
- Accurately assessing a business value requires experienced
professionals with a strong command and understanding of the
many variables that can determine value.
Generational Wealth and Equity can assist you in realizing maximum value for your business
- The team at Generational Wealth and Equity is comprised of motivated members with vast
experience in selling businesses. Our experience, results and roster of
successfully completed transactions speak for themselves. We offer
objective, high level financial and strategic advice to middle market
businesses.
2002 Industry Valuation Multiples
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