As a mergers & acquisitions specialist and business investor, I often meet owners planning to sell their businesses within the next couple of years.
One common question that frequently arises is: “Why are business valuation methods so utterly confusing?”
In my personal opinion, some of the more exotic methods are particularly frustrating, since most valuations are ultimately decided by two things.
One is what the owner wants for it. The other is what someone is prepared to pay for it.
But the reality is that there are numerous ways to value a business, which can be overwhelming for owners. Some methods will simply be used as a way to justify a specific number the owner has in mind.
This article aims to clarify various business valuation methods and provide guidance for SME owners navigating what can be a complex process. It’s worth stating that a conversation with an M&A specialist can make all the difference in reaching the best possible valuation and outcome when the time comes to sell.
Valuation Methods
Each business is unique, which is why multiple valuation methods exist. These methods accommodate the specific characteristics of each business and are influenced by factors such as financial performance, industry trends, and even the owner’s personal preferences.
Here are several popular methods, including those cited in Harvard studies:
+ Asset-based approach
+ Income-based approach
+ Market-based approach
+ Discounted cash flow (DCF) method
+ Multiples method
+ First Chicago method
+ Venture capital method
+ Real options valuation
+ Economic value added (EVA)
Choosing the Right Method
Deciding on the appropriate valuation method depends on the nature of the business, its growth potential, industry dynamics, and the owner’s objectives. Nine times out ten, business owners of established businesses choose a multiple of EBITDA as the justification of the payday they seek. And nine times out of ten, the multiple they select is higher than the average for their sector!
Assessing Your Business’s Unique Characteristics
It is important to understand your business’s strengths and weaknesses, financial history, and growth prospects. This assessment allows you to identify the valuation methods most suitable for your business and in the end, ensures an objective and fair valuation.
Maximising Business Value
By working together, we can develop a strategy to maximise your business’s value and attract the right buyers. This may involve improving financial performance, enhancing operational efficiency and identifying potential synergies with buyers. It’s likely there will also be the opportunity to grow your business inorganically, through acquiring other businesses along the way.