How Much Is My Business Worth?

HOW MUCH IS MY BUSINESS WORTH?

We take time to get it right

Far and away the biggest question business owners have when they are considering a sale of their companies is, “what’s it worth?” Naturally, providing these potential sellers with an answer to that critical question is one of the first steps in the Sigma DealMap™ process. While there are business valuation techniques used for wealth planning purposes, tax compliance, litigation support, partnership disputes, etc., our focus is on providing the business owner with the company’s “fair market value.” In other words, an approximate price the business owner can expect interested buyers to offer for the company. This fair market value technique is what Sigma Mergers & Acquisitions utilizes for business owners seeking an exit strategy.

Science and Art

Sigma Mergers & Acquisitions follows a valuation method that not only makes sense to our clients, but also produces a high level of credibility and success with potential business buyers. While some of these processes are proprietary in nature we can disclose that we employ both a science and an art to business valuations. Our process focuses on a knowledge of the business, knowledge of the industry and an understanding all of the value drivers of the business, which can include:

Unique competitive advantages
Barriers to competitive entry
Diversity of customer base
Quality of the workforce, including management depth
Growth potential
Systems in place to operate business
Condition and value of facility and equipment
Industry type
Seller’s discretionary earnings (SDE), cash flow or EBITDA
Reason for Selling

Financial Analysis

Each of these value drivers are critical to the valuation process, but the importance of reliable financial information naturally cannot be overlooked and to many buyers is the most important value driver. While many business buyers focus, in our opinion, far to much on financial information, we emphasize that financial data alone does not create or produce the true value of the on going business. Don’t get us wrong, we indeed examine closely the financial data and perform modeling techniques on the financial information.

Different valuation methods view earnings differently but based on the size of the company the cash flow of a business can be characterized as SDE (seller’s discretionary earnings), or EBITDA (earnings before interest, taxes, depreciation and amortization).

During the financial analysis phase we review primarily the P&Ls, balance sheets and tax returns.

The objective is to:

Determine the amount of “discretionary expenses” that are not essential to the day-to-day activities of the business

Identify those expenses that are non-recurring or are unique “one-time” expenses

Verify that the expenses associated with the owner qualify as add-backs

Analysis of the balance sheet (although we understand that many of the businesses we review have incomplete or inaccurate balance sheet reports)

BENCHMARKING COMPARABLE BUSINESSES

Once the review of the financial data is complete and we understand how much money the owner truly makes from the business, we can begin benchmarking the company. In this step we are looking for sales of comparable companies. We start with a narrow and focus – SDE, revenue, industry, geography, timing – looking for similar businesses, and then expand our search from there. Ultimately we are trying to determine what similar businesses have sold for recently.

Additionally, this benchmarking extends beyond comparable sales and into industry standards. Each business type has specific valuation parameters that can differ greatly. For example, landscaping contractors are traditionally valued using different multiples than software developers. So based on the company’s industry, we want to understand those standard metrics as one aspect of the business valuation.

SALE PRICE MULTIPLES

No valuation would be complete without reviewing the “multiple” concept that is so widely employed by business buyers. Unfortunately, we find that many business brokers and prospective buyers alike often focus strictly on this concept as a sole means of determining value and do not consider the underlying factors of the valuation process. Too many variables, or value drivers, exist to just routinely apply a multiple to SDE or EBITDA in order to establish a value. This approach, as a singular solution, is a disservice to the client and one that fails to provide a professional level of representation. Sigma does not take these shortcuts. So while multiples are important to the business valuation, they shouldn’t stand alone – taking into account the value drivers shown above, as well as many others, is the only truly fair way to determine a company’s actual market value.

DO THE NUMBERS WORK?

Even after all of this detailed analysis, one last step remains – making sure the numbers work. Specifically, based on likely financing sources and the size of the transaction, does the business generate enough free cash to accomplish two main factors. First, how long does it take the buyer to recoup his or her equity injection, and second, how much of the business free cash is servicing debt from that acquisition? These are key ratios that need to be analyzed to make sure the value placed on the business provides adequate returns in both of these instances. If thee ratios are out of line, then the valuation methodology needs to be revisited to see what caused this outcome.

Free Valuation

Want to know how much your business is worth? Is your business generating over $500K in yearly revenues? Fill out the form below to request a custom valuation for your business.

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Kash Battla

17:43 05 May 22

I am happy that I found Scot. He was able to sell my business for more than I thought I could get for it. The difference was his expertise and experience in the business field. I highly recommend his company.

Patrick Savago

05:42 11 Jan 22

Wow, this is the most thorough up front CIM I've ever received, props to you guys on having easy onboarding systems. Getting some of this data from some other brokers / sellers has been like pulling teeth.

Chris McKinney

12:43 03 Nov 21

Scot,I am very impressed with the system you have in place beginning with how easy it is for a prospective buyer to sign the NDA, view the business profile, and then view an interview with the actual owner all in an automated fashion. After not being very impressed with most of the brokerage firms I've encountered, I was blown away with the ease of your process. You are easily a cut above with this system you have in place. The interview asked most of the questions I would have asked the seller to begin with which is super helpful as well. Kudos to you and your firm!

Melissa Smith

22:36 06 Oct 21

We would highly recommend Sigma Mergers & Acquisitions for their knowledge and execution of a business sales transaction. Scot has a wealth of knowledge and walks a seller through the steps of selling a business in an organized and thorough way. We appreciated the high level of ethics that Scot and Jeremy displayed. We would definitely work with them again if the opportunity arises.

Marilou Colson

11:20 23 Apr 21

This company is amazing. well experienced, extremely knowledgeable in all aspects, and makes sure you understand what is going on at all times.They respond fast to questions and get back to you even when they are busy.contact them today,highly recommend. Thank you!