How to determine what your company is worth?

Written by Reed Phillips and Mx3 Collectif

At one time or another, most of the CEOs and owners we work with wonder how much their businesses are worth. They’ve spent years building their companies and want some recognition that it has all been worthwhile.

There are several ways that owners can determine their value. One way is to estimate your value based on what a competitor sold for. Another is to get an inbound offer from a buyer who reviews your company’s financial information and determines how much they would be willing to acquire the business for.

Both of these approaches are flawed.

You can’t rely solely on the value of your competitor’s business to determine what yours is worth. That’s because there could be many differences between the two businesses that make one more valuable than the other. For example, if your competitor is the market leader, their business is probably worth more. Same thing if they own intellectual property that you don’t have. But, on the other hand, your business may be worth more if you have a first-rate management team and have been growing faster than the competitor.

Likewise, getting one inbound offer from a buyer is not likely to represent the true value of your company because you have no idea what other buyers might be willing to pay. An unsolicited offer can be for a lot less than what your business is worth. That’s because buyers often do not offer their top price when making their first offer.

"The best method, in my experience of more than 30 years of selling companies, is to run an auction where many prospective buyers are approached. The auction process tends to deliver the best results for sellers because it puts the process in control of the seller, not the buyer." - Reed Phillips

Obtaining an accurate valuation

If you are not inclined to sell your business just yet, you can still get an accurate estimate of the company’s value. To do this you should hire a valuation expert or investment banker who has knowledge of other transactions and knows your industry. Their approach will be to review all recent transactions in your industry as well as what the public companies in your industry are valued at and use the multiples derived from this work to assign a multiple to your business. For example, they may find that 8x EBITDA is the right metric to use and if your business does $5 million in EBITDA that would establish your valuation at $40 million.

Valuing a company is as much art as science. It is not simply about the numbers (your financial metrics) but also qualitative factors like market size, market position (are you the market leader or #5), growth opportunities, intellectual property and many more. The more these qualitative factors can be considered alongside the quantitative ones, the closer you can get to your company’s true value.

For example, even though other companies in your industry may be selling for 8x EBITDA, as shown in the example above, your business may be worth 9-10x EBITDA if it is truly one of the premium companies in the industry. And, companies that are not performing well could be worth 6-7x EBITDA, or less.

I believe that valuation is a critical metric for any business. You shouldn’t guess what your business is worth or use flawed methods. You should find a way to get a good assessment so that you can plan for the future based on the value you have already created.

Reed phillips
Reed Phillips New York, United States
CEO and Managing Partner
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