What is Your Business Worth? Roadmap to Help Determine Value of a Privately Owned Business
The sale of a business is an emotional, life-changing event and determining its true value is a crucial first step in any sale process. Also, business owners may have a preconceived idea of what their business is worth and their value expectations may vastly differ from those of prospective acquirers. So, business owners need to be prepared and know their next move if approached by a potential buyer or have a plan if they are contemplating exiting their business in the near future. The bottom line is that the notion of “value” is fluid in nature and demands an understanding of what the business is worth to a potential acquirer as opposed to what it is worth to the owner. Let’s proceed with the steps to determine value.
Three Generally Accepted Methodologies for Valuing a Company
When working with a trusted investment banking partner, the deal team will utilize a subset − or all − of the following valuation methodologies to determine company value, all having benefits and challenges:
1. Precedent Transactions Analysis – This method estimates the implied value of a business by analyzing recent acquisition multiples paid in comparable transactions.
2. Comparable Company (Comps) Analysis – This approach leverages valuation multiples of publicly traded companies to derive the valuation of a privately owned business in the same or similar sector.
3. Discounted Cash Flow (DCF) Analysis – This method values a business by forecasting its future underlying free cash flows and discounting them to their present value.
Factors Impacting Valuation and Key Considerations
While theoretical valuation methods, as presented above, set the basis for estimating the potential purchase price of a business, various other factors – external and internal – will impact the ultimate transaction value.
External factors encompass overall economic outlook, geopolitical circumstances, specific market/industry conditions, general M&A activity as well as the availability and terms of financing, among others.
Internal or company-related factors include attributes, such as revenue/profit size, stickiness of revenue, margin profile, growth history, depth of management, nature and dependency from customer and supplier base and competitive advantages. A synopsis outlining critical business aspects and associated buyer considerations is presented in the following table:
Industry Sectors in Demand
The table below provides an illustrative list of sectors that have witnessed resilient M&A activity and healthy valuation multiples over the past few quarters. Sectors in favor include companies with strong end markets, tangible growth opportunities, visibility of earnings, ongoing consolidation strategy and attractive free cash flow and margin profile.
Premium Valuation for High-Performing Businesses
A strong financial profile is one aspect which will positively affect the value of a business. Specifically, the “quality premium” is the reward in valuation for above-average financial performance which in the analysis herein is defined as companies with revenue growth rates and EBITDA margins above 10 percent for the trailing 12-month period (or one above 12 percent and the other metric at least eight percent). In 2023, above-average performing companies received a 28 percent greater EBITDA multiple compared to those that did not meet these criteria.
One Final Consideration – Selecting the Right Investment Banking Advisor
No matter what valuation approach is used, or attributes a company possesses, the main takeaway remains: a business is only worth as much as someone is willing to pay for it. A healthy pool of potential acquirers ensures competitive tension in a deal process – often driving up the valuation of the target company. An experienced investment banking advisor should define the appropriate type of process for the business, obtain a higher value and significantly increase the odds of closing a successful transaction than any business owner could accomplish on his or her own.
Contact Us
Alberto Sinesi
Director
PKF Investment Banking
asinesi@pkfib.com | 203.273.5024
Robert Murphy
Senior Managing Director
PKF Investment Banking
rmurphy@pkfib.com | 201.788.6844
About PKF Investment Banking
PKF O’Connor Davies Capital LLC (DBA PKF Investment Banking) is a subsidiary and investment banking affiliate of PKF O’Connor Davies Advisory LLC. Securities-related transactions are processed through an unaffiliated broker-dealer, Burch & Company, Inc.
Whether a business owner is ready to sell the company or seeking growth through acquisition, our investment banking team is committed and credentialed to help owners achieve their objectives. PKF Investment Banking provides guidance through every step of the process and brings the expertise to enhance certainty to close – while always staying focused on maximizing the value derived from the transaction.
With deep expertise in and a dedicated focus on advising privately held middle-market businesses, the PKF Investment Banking team has completed over 300 M&A and capital raise engagements in North America and abroad during their careers. Our key services include sell-side and buy-side M&A advisory, exit readiness and transaction planning. For more information, visit www.pkfib.com.
PKF Investment Banking provides this report for information purposes only and it does not constitute the provision of financial, legal or tax advice or accounting or professional consulting services of any kind.
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7 Reasons to Use an Investment Banking Team to Sell Your Company
Are You the Best Person to Sell Your Business?
Enhancing deal value and increasing certainty to close are what investment bankers do every day. As competition and technological advances continue to drive consolidation across many industries, it’s likely you’ve been contacted by a variety of buyers, or their agents, interested in acquiring your company.
According to S&P Global Market Intelligence, global private equity dry powder soared to a record $2.4 trillion in mid-2023. Private equity firms are in business to secure returns for their investors, so all that cash needs to find a home. In addition, strategic buyers are actively searching for acquisitions as a component of their growth plan.
As an entrepreneur, you’ve succeeded by seizing opportunities, and it could be tempting to pursue a specific buyer who appeals to you. However, even if you’ve sold a company before, it’s rare that a business owner can maximize value and achieve superior deal terms on their own.
The Right Investment Banking Team Empowers You
The team you should rely on is one that has gained wisdom by completing hundreds of deals ‒ and seeing some failed deals too. For the most important sale you’ll ever close, it’s critical to engage the right investment banker who can empower you all through the deal process, from start to finish.
An experienced investment banking team can enhance the value of your business and increase certainty to close by providing:
- Multiple deal options – The only way to know if you’ve received the best possible offers for your business is through a competitive auction among buyers ‒ including those you’re aware of and those you never knew existed. An astute investment banking team has the capabilities, resources, and processes to present you with a range of options.
- Negotiating prowess – While you may be able to skillfully negotiate various transactions related to running your company, the team working on your deal is better positioned to garner the highest value and best terms for your business.
- A buffer between you and buyers – Staying focused on keeping your business growing and profitable is crucial during the marketing and sale process. Plus, selling a business can stir up a lot of emotion. Best to let professionals take the lead in negotiating value, deal terms and critical deal issues with buyers and other professionals throughout the transaction.
- Early warning system – A mature investment banking team can recognize when the other party is not sincere or when the certainty of closing a deal is low. You don’t want to waste time on a buyer who is displaying low odds of completing a successful deal.
- Guidance based on market trends and dynamics – Understanding the current market value and terms is key to setting realistic goals. An effective team can identify and convey the real and often hidden value of your business to buyers. This increases your chances of receiving a premium offer compared to market benchmarks.
- Creativity and resourcefulness in resolving deal issues – Anticipating business issues that are likely to arise in due diligence and preparing management to address them will reduce the risk of a broken deal. Since few businesses have no shortcomings, challenging issues that arise either before or during due diligence often require investment banking creativity to resolve.
- Maximum deal control to your advantage – The deal journey can be formidable. Investment bankers are skilled at controlling the sale process and driving to the closing date.
Team Up with Experts
High-performing investment bankers don’t have just one or two techniques they rely on to achieve success. They set standards of excellence for themselves and are systematic about realizing those standards on every deal. By partnering with the right team, you’ll be bringing integrity, expertise, options, deal control and unshakeable confidence to the sale of your most valuable asset.
Contact Us
If you’re thinking of selling your business in the near future, contact us for a preliminary conversation as to your company’s readiness for a marketing process or for a complimentary value assessment.
Robert Murphy
Senior Managing Director
rmurphy@pkfib.com
561-337-5324
201-788-6844
10 Ways to Position Your Business for a Successful Sale
While you may be confident in the unique advantages and future prospects of your company, most potential buyers will need to be convinced beyond a doubt. Strength testing your business before approaching buyers is critical. When your company’s information and outlook are transparent, buyers will compete to buy it, driving price and favorable deal terms for your business.
For most private business owners, the sale of their company is the most important financial transaction in their life and can be transformational.
If you’re considering a sale this year or in 2024, now is the time to get prepared. Start by checking these critical deal success factors:
1. Obtain a realistic value range. You should have an understanding of the value range for your business and ways you can increase such value. In addition, you should confirm that this value will meet your financial objectives.
2. Accurate historical financial statements. Income statements and supporting detail need to be accurate and readily available. In addition, your company’s balance sheet should be checked to ensure all assets and liabilities are captured and fairly stated. Accrual basis financial statements will be required.
3. Projections for 1-3 years out should be bold but achievable. Work with your M&A advisor to develop financial projections that will be foremost in buyers’ minds when making offers. Plan to surprise only on the upside!
4. Build an experienced M&A deal team. An M&A advisor with a strong track record of selling companies in your value range and who can reach the right buyers domestically and internationally is key. You’ll also need a tax advisor and a corporate attorney focused on M&A.
5. Select managers for an internal deal team. All operating shareholders should be involved in the sale process, and it’s also advisable to enlist the support of one or two senior financial or key employees. With guidance from your M&A advisor, this can be done skillfully at the right time in the process.
6. Clarify and implement your growth story. Realistic, well-formulated growth opportunities increase the likelihood of attracting premium value offers. Are you ready to present buyers with concrete expansion opportunities that could be achieved with additional growth capital?
7. Identify and address potential risks. Objectively review any present or future risks associated with your business and devise strategies for mitigating them. These could include customer or vendor concentration, nexus issues, regulatory changes, employee retention, supply chain challenges, technology disruption and many others. Buyers will challenge everything; be prepared so your deal does not get delayed or lose value.
8. Know your Key Performance Indicators (KPIs). Demonstrate how efficiently you run your company by setting up and monitoring a dashboard of metrics appropriate to your industry that buyers will expect to be available.
9. Double down on documents. Every contract, registration, benefit and insurance plans, tax filings (last 3-5 years are typical) and other documents related to your company will need to be gathered into a virtual data room before a deal can close. Early in the process, your M&A advisor will supply you with a list of required documents.
10. Fire on all cylinders as you run the business. You and your management team must stay focused on the business, driving growth and profitability throughout the sale process. The importance of meeting or, if possible, exceeding projections while your company is in market cannot be overstated.
Contact Us
If you’re thinking of selling your business in the near future, contact us for a preliminary conversation as to your company’s readiness for market or for a Complimentary Value Assessment.
Robert Murphy
Senior Managing Director
PKF Investment Banking rmurphy@pkfib.com | 561.337.5324 or 201.788.6844
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Check these 5 Boxes Before Choosing an M&A Advisor to Sell Your Company
The 2022 outlook for deal activity is robust and sellers are expected to hold the advantage − as long as they have a skilled M&A team leading the way.
By Robert Murphy, Senior Managing Director
Engaging an effective Mergers & Acquisition (M&A) advisor to sell your company is critical to a successful outcome. Even the fastest-growing companies in high-demand industries require an adept deal team to ensure shareholders receive the value and terms they deserve. The right M&A advisor can also generate fresh ideas and identify unique opportunities, as well as navigate to a timely close, while the wrong advisor could lead you astray − or merely let your deal languish when larger deals draw away their attention.
What should a business owner consider in selecting an M&A advisor? Here are five key criteria to use
when evaluating potential advisors:
1. Overall Comfort Level. First and foremost, choose a firm that conveys professionalism, trustworthiness and communicates straightforwardly. From the outset, you should feel a sense of confidence that the M&A team will always put your best interest first and give you honest advice.
2. Vast Deal Experience. Since every merger and acquisition transaction is different, there’s no substitute for experience in this industry. Choose a team that has closed many transactions (in excess of 100) to ensure they possess deep knowledge of all the intricacies involved in closing successful deals.
3. Without Thorough Preparation, There Is Only Hope. Surprises and deal delays hurt values and kill deals. The right firm will have a clearly defined process and expertise to fully prepare you and your company before going to market. Diligent preparation is essential for increasing certainty to close and for maximizing value.
4. Robust, Global Marketing. Is the M&A firm willing to, and capable of, contacting all qualified buyers and not just a small group? Also, your business could be attractive to overseas buyers. That’s why engaging an M&A firm with international reach and cross-border transaction experience is a key advantage. In almost all cases, contacting more buyers results in more offers and opportunities, which increases certainty to close and maximizes value.
5. Passion for Working with Companies of Your Size. Be sure the M&A team you select is committed to closing deals in your size range. Some firms will take on smaller deals but shift their energies to larger deals as they come in. Your deal should be meaningful to the firm, and you should be sure the team will be “all-in” for getting it done. You may be wondering: “What about industry specialization? Don’t I need an advisor who focuses on my industry?” There’s a good reason why industry expertise is not among these five advisor “must-haves.” It’s because technology has leveled the playing field. In fact, buyer contact information and transaction data across all industries are readily available today, making industry specialists in most sectors not a driving factor in selecting the right firm. An M&A firm that has invested in multiple data sources can offer insights into realistic value expectations and target buyers,
as well as provide the full-range M&A guidance to clients in virtually any industry.
If you’re thinking of selling your business, contact us for a preliminary conversation as to your company’s readiness for market or for a Free Value Assessment.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfod.com
561.337.5324 | 201.788.6844
M&A Outlook for 2021: An Active Seller’s Market
A Wealth of Opportunity for Owners Considering Selling Their Businesses
The year ahead holds the promise of a dynamic seller’s market likely to drive a healthy mergers and acquisitions (M&A) market. Companies with strong operating performance should be highly competitive. With a flexible approach and proper planning, even those that suffered setbacks can garner buyers with attractive offers in an arena flush with capital.
The promising M&A market in the year ahead reflects the interplay of several key factors: low interest rates, abundant capital in search of targets, larger companies seeking to grow and diversify through acquisitions, aging baby-boomer business owners ready to exit and optimism for an economic landscape improving with the rollout of COVID-19 vaccines.
Despite the pandemic-induced economic crisis that raged throughout the year, the Dow and S&P 500 finished 2020 at record levels, up 7.25% and 16% respectively. Public market activity was also strong in 2020, with 480 Initial Public Offerings (IPOs) in the U.S. market, including 248 Special Purpose Acquisition Company (SPAC) transactions, an increase over 2019’s 233 IPOs, with 60 SPACs. After taking a significant hit in the second quarter of 2020, M&A activity, along with the stock markets, rebounded sharply in the third and fourth quarters – a trend expected to persist well into 2021.
Source: Capital IQ and PKF Investment Banking Research
Private company transactions in 2021 are expected to continue the
strong comeback pace set in Q3 and Q4, 2020.
Favorable Interest Rates: Interest rates remain at historically low levels with the 10-year Treasury rate at 1.10% and the prime rate at 3.25%, as of January 22, 2021.
Demand Exceeding Supply: The setbacks many companies endured in 2020 have limited both the quantity and quality of attractive acquisition candidates, contributing to a heightened level of buyer demand that exceeds supply by a large margin. According to the Wall Street Journal, there is abundant pent-up demand for deals, coupled with an estimated $1.5 trillion in private equity “dry-powder” that must be deployed. This excludes the capital held by non-financial buyers that are looking for acquisitions and investment opportunities.
An Industry-Specific Approach: The 2021 market could be considered a “tale of two companies.” One company with operating results not impacted by COVID-19 sells at the same valuation multiple or higher as it would have pre-COVID-19 with the same or similar consideration structure. Yet, another company with financial performance negatively impacted by COVID-19 sells at a reduced valuation multiple with a 3-year earn-out component. The first example is more likely to represent companies in the e-learning, cybersecurity and home entertainment sectors while the second group includes the entertainment, hospitality and retail industries that suffered substantially. Therefore, in cases where COVID-19 has negatively impacted a company’s operating performance, buyer creativity and seller flexibility will be key to completing a transaction.
Trends to Watch: Sellers should be aware of, and keenly attuned to, essential developments affecting business valuations and transaction terms in the year ahead. Understanding how these can influence a sale are central to preparing for, and orchestrating, a successful deal. Examples include the following:
- Stable or increasing valuation multiples in sectors with minimal or no negative impacts from COVID-19.
- Lower valuation multiples in certain sectors due to decreased debt leverage, lower financial performance and lack of visibility with future earnings.
- Increase in use of seller notes due to decrease in debt leverage and desire for more liquidity at transaction closing.
- Increase in use of contingent earn-outs due to lack of visibility with future earnings or to bridge valuation gaps between seller and buyer.
- Increased use of subordinated debt in the capital structure due to decreases in bank leverage.
- Elongated due diligence period due to buyer/lender’s desire to see more current operating results, additional financial modelling scenarios and work from home/travel concerns.
- Heightened attention on continuation of profitability and growth.
- Adjustments for non-recurring COVID-19 impacts, both positive and negative.
In today’s M&A market, more than ever, valuation multiples, consideration structure, deal terms and closing time are specific to the company and the industry. We encourage business owners considering a sale in this promising market to contact us for a no-obligation, confidential conversation.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfod.com
561.337.5324 | 201.788.6844