Many of the businesses we talk to raise the issue of how to value their business. Unlike shares in a publicly listed company like BHP or Commonwealth Bank, there’s no way to track value on a day to day basis.
Understanding the accurate value of a business is a challenging task and requires a deep understanding of the industry at hand and how a business operates within that industry. Talk to us to discover the maximum value of your business.
We start with a few fundamental questions about the company structure before jumping in to the valuation side of things:
For the purposes of this example, let's assume the following:
This is a common scenario that our team comes across. In this example, we look to value the business as a whole. Once we've done that, we distribute the value to each shareholder proportional to their shareholding (i.e. 50 per cent each). Often there is a case for one shareholder's shares being worth more than another's - based on the size of the shareholding, their legal rights, and whether the shareholder is involved with the day to day running of the business or not.
There are a few ways to go about valuing this business. The typical method is to use a multiples approach. This is based on a multiple of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).
In the example above, a manufacturing business is typically valued between 3-4x EBITDA. This suggests the business would be valued at $9m - $12m.
Tax and the cost of debt can vary a lot between companies and in different countries, so EBITDA is typically used to normalise for these variables. This gives a more accurate picture than using net profit or profit after tax.
Other approaches are to:
Industry multiples for manufacturing businesses vary depending on the type of manufacturing, the intellectual property and specific factors related to the business itself. These can range from:
As such, it is useful to find a similar business which has recently sold or been acquired and use that as a benchmark for the EBITDA multiple to establish a valuation guideline.
Other complications when calculating a private company’s valuation is taking in to account the various business-specific factors which can add or subtract value. We detail some of these in the sections below:
At any time in the economic cycle, different sectors will be considered attractive for investment or acquisition.
At one point in the last 15 years, retail, consumer goods, technology, financial services, food and beverage, and advertising and media have all been the most sought-after sector. Whereas in recent years, retail and financial services are in low demand.
Identifying which sector the business fits in to will ensure the right buyer is attracted and valuations are appropriate.
Are they contracted or ad-hoc and is revenue from clients predictable or project-based? In order to accurately calculate the value of a private business, a buyer will need to ascertain:
A buyer looking to purchase a private company may already be in the industry or can be a party looking to diversify into a new sector. In either case there are two key considerations for the long-term success of any acquisition:
How you structure a sale, with earnouts, transition periods, management share plans, and other incentive mechanisms will help to temper a buyers concerns and potentially improve the value of a private business.
By considering the variables, as well as any specific factors which affect your business, you can work towards a valuation range for a private business.
The Nash Advisory team are experts at valuing businesses and private share holdings in preparation for a sale or liquidity event. Talk to us to find out more.