Business Valuation Resource

A properly implemented Business Valuation Resource will help guide principal owners along with senior management of mid-market companies in correctly assessing the current market value of their company.  Various unique factors should be taken into consideration before determining any final conclusions.

Constructing an appropriate Business Valuation Resource is critical to the on-going success of any company. For additional assistance please contact a specialist through Capital Investment Advisor.

Top Two Business Valuation Resource Myths:

1. There is really no legitimate reason for a valuation.  I have been told that this is only necessary if and when we require additional financing, or as a prerequisite to being sold.

Certainly the above situations mandate the necessity for a comprehensive Business Valuation.  What has not been taken into consideration would be the internal transition of ownership.  Prior to the death of a principal shareholder, gifting some percentage of stock to family members during the owner’s life will reduce the tax liability on the owner’s estate at death.  Another substantial consideration if the firm consists of multiple owners should be a buy-sell agreement accompanied with the appropriate life insurance for key executives.  The life insurance pay-out (face value determined by the Business Valuation Resource) would provide the means for sufficient funds, distributed to the beneficiaries  to acquire the deceased ownership at an agreed upon value. The valuation should be updated on a regular basis to correctly reflect the company’s financial progress over time, and to ensure compliance with one of several acceptable IRS methods.

2. I know what my business is worth.  The EBITA is two times annual revenue.

Revenue multiples, primarily employed by business brokers tend to be median multiple values and historically have proven to be all over the lot.  As with another median value, it is just a convenient and general rule of thumb.  This method does not accurately reflect the revenue multiple for any actual transaction, but merely reflects an average.  This raises the question: Is your firm above or below average for your industry???

For example, Pratt’s Stats had previously listed revenue multiples for firms in the automotive parts industry ranging from a low of .98 to a high of 8.3 with a median of 2.9.  If the annual revenue was $1,000,000, then the value of the company would be $980,000 on the low side or upward of $8,300,000 on the high side, or perhaps some where in between.  The company’s rightful place within this range is obviously important.

Business Valuation Resource Methods:

• General Rules
• Discounting
• Activity Based Costing
• Commodity Theory
• Replacement Value
• Pay Back Method
• Internal Rate of Return
• Hurdle Rate
• Discounted Cash Flow
• EBITA

Any prudent owner or senior manager would be well advised to know the true value of their business, even if they intend to retain ownership.  In both theory and practice, as an owner you must acknowledge that if you are not selling your business, then each new day invested in your business is a renewed commitment to buying it.

Constructing an appropriate Business Valuation Resource is critical to the on-going success of any company. For additional assistance please contact a specialist through Capital Investment Advisor.

Article written by Robert Pino staff writer for Orion Foundry (US), Inc.