How much is my company worth?

How-much-is-my-company-worth-650The value of your company will be based on its current operations and its potential for future growth.

A rough estimate:

Because there are hundreds of transactions a year, market average multiples can help you determine a rough value for your company. Risk is the primary driving force behind the multiples. Whether an equity or strategic investor, the investor’s offer inevitably reflects the future value of present cash flow.

Valuation Methodology:

Calculating Value using different methods provides logical insight as to how your company is creating value. Alternative methods provide a good cross-reference analysis in determining which aspect of your company has created the most value.

Asset Method

Revise your balance sheet so that it reflects today’s market value. This will be important in supporting your ability to procure debt on assets for tax purposes.

Earnings Method

Earnings are the most common tool to analyze when valuing an ongoing business. Plant, property and equipment can lose their value if they do not generate earnings.

The following tangible assets should be reviewed:

  1. Accounts receivable – Are there adequate reserves for bad debts?
  2. Inventory – Are some items obsolete, over-valued, under-valued or no longer listed on the books?
  3. Land – Land is usually listed at cost and may have appreciated beyond book wvalue.
  4. Buildings, machinery, furniture – Deduct any non-contributing (not used in the business) assets.  Oftentimes replacement value of certain assets is greater than the recorded book value.  Some valued assets may also be obsolete.
  5. Vehicles – Is the owner keeping the company car?
  6. Loans due from officer – Deduct this from company value as it will be paid at closing.

The intangible assets need to be reviewed as well:

  1. Going concern – What is the value of foregoing the start-up costs and corresponding risks associated with starting a new business?
  2. Patents, software or licenses – Is there a competitive advantage due to proprietary information? What is the value of anticipated license fees or royalties?
  3. Favorable leases – How much more would a buyer need to pay elsewhere?
  4. Trade secrets or formulas – If important to the business, what is the cost to replace?
  5. Customer and supplier lists – How proprietary and valuable is this information?
  6. Goodwill – Are there other reasons, such as reputation, that create value?

Knowing the value of tangible and intangible assets allows the following methods to be applied:

  1. Adjusted book value – This approach calculates the replacement cost of tangible assets less any debt.  Adjusted book value is normally the minimum an ongoing business should sell for because no value is considered for earnings capacity.
  2. Cost to create value – This figure is the total of adjusted net tangible assets plus intangible assets and start-up costs such as assemblage of personnel and assets.
  3. Liquidation value – If all else goes wrong how much cash would an asset sale raise?
  4. Multiples of value – Industry averages may indicate a ratio of assets to earnings which suggests a multiplier for estimating value.  Applying a multiple to assets is a worthy exercise but should not be the sole determinant the value.

Some common red flags include:

  1. Seasonality – Is revenue dependent on a certain time of year? What happens if Q4 doesn’t work out?
  2. Inconsistency– Is revenue s consistent month to month? Was this year a banner year or is this typical?
  3. Customer concentration – What is the percentage of sales from the top three customers?
  4. Key man risk – If I buy this company and key producers exit, will customers still leave for my competition? Is there more than one person capable of running this company?
  5. True cost to own – What does it really cost to make this product? Are my cash flows going to be exhausted by capital expenditures?
  6. Commoditized product – Are there to many providers and little differentiation in products that margins are to small?
  7. Welcome competition – What are the barriers to entry? Can anyone with limited capital and a website get into the business and steal market share?
  8. Regulatory uncertainty – Am I relying on the agenda of politicians to maintain revenue? What if the next president’s policies negatively affect the business?
  9. Technological obsolescence – Is this industry being replaced by new technology?
  10. Value add uncertain – Is this an unnecessary product that will go first in a budget cut?
  11. Limited product line – What happens if my main product goes out of style or is copied by a competitor? What do I have to ensure the revenue growth continues?