One of the most frequently asked questions I receive from people buying or selling a business or raising money is: how do I value the business?
Building a thoughtful valuation for a business requires access to data that is not public. And it isn't cheap or free. Professionals use data sources, like Venture One and Mergerstat, but don't stop there. We typically add public data, carefully culled from SEC filings, to gauge values for public companies.
We don't just grab the data, but analyze its relevance for each use, taking into account differences in company size, the age of the data and other variables that can impact significantly the data we're reviewing.
Professionals also like to use a discounted cash flow analysis, which incorporates forecasts of future cash flows, discounted to their present value. That said, I find the exercise more valuable as a means of confirming other data than of actually valuing a business. Market data is much more meaningful.
We often get the assignment to provide a fair and honest valuation for businesses and their assets for regulatory purposes. One of the lessons we've learned from this is that like all data, valuation statistics can be manipulated.
Know some of the basic skills of busines valuation can help buyers and sellers negotiate deal prices knowledgeably and fairly.
The following ratios are some of the basic ratios to consider:
- Price to Sales
- Price to Earnings (net)
- Price to Cash Flow or Price to EBITDA
- Price to Book
After considering these multiples, equity value is typically adjusted upward to reflect cash on the balance sheet included in the deal and reduced for debt to be assumed.
I hope these simple tips help you in your valuation exercises.
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