Determining the value of your business is a common inquiry, and while it's a fair question, arriving at a straightforward answer is rarely easy. Frequently, we hear comparisons like "Joe sold for 10X adjusted EBITDA; why not us?" However, aligning valuations with selling prices is a complex task.
So, how do potential acquirers assess the value of the businesses they consider? Primarily, they require confidence in the provided data. Surprisingly, before delving into financials, acquirers prioritize confirming the reliability of information as a key element in their decision-making process.
At Golden Shield, we mandate a comprehensive process for our business owners, including:
1. Quality of Earnings report – An audit of adjusted EBITDA.
2. Legal Audit – Ensuring compliance with legal aspects, such as updated minutes, adherence to agreements, employment contracts, and assignability of contracts.
3. In-depth Company Questions – Seeking a holistic understanding of the business, spanning operations, marketing, finance, culture, software, and strategic planning.
This diligence process instills confidence in potential acquirers, making them more likely to proceed with the transaction, reducing costs related to diligence, and often leading to a willingness to pay a higher price.
Metrics play a crucial role as well. Factors such as customer concentrations, market focus (positive or negative), contracts for recurring revenue, and the business's client mix significantly impact valuation. For instance, two HVAC businesses with identical $1 million EBITDA may differ significantly in value based on their focus—new construction versus servicing.
The strength of the Management Team is another vital aspect. Most acquirers prefer not to operate the company themselves or seek replacements for the management team. Therefore, having a capable and incentivized management team post-closing is pivotal for driving value.
Understanding the diverse types of buyers in the market, such as accredited investors, corporate strategics, family offices, independent sponsors, hedge funds, private equity, and search funds, is essential. Identifying the most probable acquirer type and evaluating whether the business represents a platform or bolt-on investment are key considerations.
In conclusion, determining the worth of your business is a challenging yet intriguing question. Golden Shield Business Brokers, a boutique sell-side business brokerage specializing in lower to middle-market businesses, assists clients in enhancing and realizing the value of their businesses well in advance of a liquidity event.