Although we are still in the midst of a pandemic, the M&A market has been active for many industry segments. Whether your business has been faced with difficulty or it has done well during this time, you may be thinking about planning your exit. One of the first questions we are asked when business owners are considering an exit is, “What is my business worth?” Valuing a business can be a bit complicated, and now owners must consider the impact Covid-19 has had on their business and the uncertainty of the immediate future.
Many business owners expect to restore revenues to pre-pandemic levels by second quarter of 2021, but even so, the loss of revenue and whether the business was a recipient of a PPP loan will be factors in a valuation.
Historically, for many people the simplest method to value a business has been to apply a multiple to the calculation of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization…or EBITDA. Add Covid to the equation, and some parties are including “C” to the calculation to get adjusted EBITDAC. While this calculation will need to disclose in more detail how it’s being utilized, it can give you a good ballpark figure, but it may not tell the whole story. A professional business valuation will look deeper into the numbers and provide a more thorough analysis of the factors that drive value, such as:
- Business Disruption – How the business has dealt with Covid (or any other financial disruption) and how it is better protected going forward will play a role in its value. Companies that have held their own or thrived will be worth more than those that have not.
- Growth Rate – What is the trajectory of revenues (past and future)?
- Profit Margins – A company that can grow and improve margins is worth more.
- Commoditized Products/Services – Buyers will pay more for businesses that aren’t saturated in the market with a lot of competition driven only by price.
- Cost of Capital – A company with low risk may have a lower cost of capital, which means higher value.
- Market Size – Is the company a market leader or small player? Is there opportunity for a new owner to capture market share?
- Management Team – Management depth without heavy reliance on one person is more desirable and valuable.
- Capital Requirements – A company that must reinvest regularly in new equipment will have a lower value than a company with few fixed asset requirements.
- Proprietary Products and Protected Assets – Businesses that have proprietary products, strong brands, patents, and trademarks can bring a much higher price.
- Financial Reporting – Financial statements need to be accurate, timely, and adjusted to exclude personal expenses or other unusual or one-time costs.
- Customers – A loyal customer base and recurring revenues provide more value to a buyer.
- Concentration of Customers – A heavy emphasis of a few clients making up a large amount of total revenues can negatively impact value and selling price terms.
- Employees – An experienced workforce may be one of the most valuable assets that is not on the balance sheet.
For a more accurate valuation that considers these and many other factors, we advise having a professional analyze and document the drivers of value and arrive at a conclusion that can be used to fully understand and maximize the value of the business. O’Keeffe & O’Malley can provide different levels of valuation services, from simple calculations of value to comprehensive reports. For valuation advice, call us at 913.648.0185 or email [email protected]