Company Valuation?

[Indy]

Let me start by saying I have contacted a Lawyer to help me determine what my company is worth. The company is co-owned , 50/50, my partner is in on the conversation, we aren't looking to buy each other out yet but do wonder what that number looks like after reviewing our shareholders agreement.

Anyone on here have an idea how to determine the value of a company? I'm sure there are some ideas on here that may help in discussion with the lawyer (want to keep the bill low as possible).

[tirebob]

Depends on the type of company, what each partner brings to the table, assets etc.. Also depends what you are doing. If you are selling the company and splitting the money or if one partner is buying out the other partner it could be totally different.

You can have two financial partners, but if they decided to separate ways and one partner is the face of the business and the one the clients know, and the other partner is only financially invested, the face of the business is worth more than just the financial guy because if the face of the business were to open a new company, 10 to 1 all the business would follow them while if it was the financial only guy leaving the table, he has no goodwill with the clients.

That is just one example. There are many factors at play is my point. As for sale value, essentially a business is worth its assets on paper and that is about it. As for the goodwill, well there you can get sideways in a hurry.

As for insurance, you have assets and loss of business calculated in (assuming you have business disruption insurance).

Good luck trying to establish value... It is not always easy!

[oldgutpile]

PM sent.

I deal with BMO, and also deal with BMO Nesbitt Burns. They have a calculation they used to help me out and set me up with one of their associates. This was actually a free service provided by the investment company. Your financial institution may have something similiar.

[KGB]

Usually 2-3 times your REAL profit.

[Stubb]

KGB is on the right track. Depending on the risk of market fluctuation take your average net profit over the last 3 years and multiply it anywhere from 1 to 5. It was explained to me this way, a company in oil and gas would be a 3 and a funeral home would be a 5.

[leeelmer]

It vastly depends on your business, and in what market you are in.
Is your business a asset rich business?
A intellect driven business?
Most businesses when you sell you get exactly zero for loyalty.
If your business is lets say equipment rentals, then you get Richee Broes auction prices for the assets, and that is about it.
But if you are lets say a new home builder, it gets more complicated, because your assets are only a small amount of money compared to what you do in cash flow, but remember selling out a business is a very different figure than buying out a partner.
Then there are businesses like lets say a chiropractor clinic.
very little asset value, and almost zero value if the only chiropractor leaves(because his patients were his, they didn't go there because of a cool sign on the door, they went there because of the care given by a specific DR.
That's why in these types of businesses they bring on a new Chiropractor and come up with a price to buy out the owner over time, with the old guy retiring in a few years.

The best practice is to have a share price, and to always adjust that share price from year to year depending on profit, and growth, and asset value.
Then there is no guessing when it comes to buying out a partner,

There is no exact why of figuring out a general price for all businesses, they are all unique and require normally banks and lawyers, and your specific industry averages to get a price.It is way more complicated than just timesing your last bunch of years profit margin buy a scale of 1-5

[Map Maker]

On dragons den, don’t they say 10x earnings?

[Trochu]

We've always used 3x-6x EBITDA.
Lots of variables though.

[Indy]

Great replies, thanks for the info. Will see where we land.

[Cement Bench]

almost all lawyers will NOT BE ABLE TO GIVE A CREDIBLE VALUATION

most can barely use a word precedent for the sale of a business

depending on industry and actual company it can be as low as 0% goodwill and as high as 7 times e-bad-dog

[tranq78]

almost all lawyers will NOT BE ABLE TO GIVE A CREDIBLE VALUATION

most can barely use a word precedent for the sale of a business

depending on industry and actual company it can be as low as 0% goodwill and as high as 7 times e-bad-dog

CB is correct. Lawyers do not do business valuations. If you want a formal business valuation done you need to use a business valuator and these are usually connected to an accounting firm. If your accountant doesn't do valuations then he can recommend an accounting firm that will.

If you want an informal valuation then you can go anywhere.

[Ceilidh69]

Very difficult process. I have a professional services business with limited assets and have seen two business valuators. Both provided very low values based on highly profitable operations. Good will is worth very little and years of high EBITDA without physical assets seems to perplex them. I bought out my partner and will be starting this again though. As others have indicated, 3-6 times EBITDA depending on the market, the terms of a management contract etc. etc. etc. Good luck.

[EZM]

I am engaged (and have been engaged for the last 20 years) on doing exactly that (those kind of assessments) when determining a proper valuation for a company. I have been a part of several hundred valuations and dozens and dozens of acquisitions both for private equity or public companies.

If you need any help - please feel free to reach out to me.

There are formula's and benchmarks out there - and a 3 times to 10 time EBITDA valuation is in the typical range but there are some mitigating factors to modify the end value of a company.

[justsomeguy]

Highly depends on what type of business....if it's one where you're just a money guy and are easily replaceable that's one thing....if it's a small company and many of your customers deal with you because of YOU and your service that's different. I know of guys who bought a small service company from a long term owner....problem was after a year his business was down 25% because many of the long-term customers had stuck with the business because of the previous owner and his contributions to the community....once he left and the new owner didn't do all those behind the scene things customers slowly started drifting off to others.

[AndersonSkiTeam]

There are certified business valuators. They are usually accountants who then get this designation. There are a lot of factors and each industry is different. There are 3-4 different types of valuations typically done but it really depends on the industry and what type of valuation you would like. Good luck

[Okotok]

The professionals are often wrong and as said before, depends on the business. For something like a construction company, three to five times EBITDA plus assets. Backlog is a big consideration. Years of operation and steady clients are another. The biggest consideration is people as otherwise, you're buying a bunch of desks and equipment/assets. Signing and retention bonuses (golden handcuffs) or other means of retaining people is a big consideration. Most businesses are all about the people there and after the non-compete runs out, many fail. If you're bringing very talented people to the table, then organic growth from the ground up is often the best choice.

[EZM]

Although type of industry matters, it only matters in terms of risk mitigation for the return on investment - so in layman's terms, if your industry is highly volatile, investors may be more cautious with risking more capital in that sector - unless there is a known, or predicted uptick in that sector (a pending shortage of feedstock or future capacity issue for example). If that business is "well positioned" to take advantage of this - you may get a higher multiplier.

The bottom line is what the return on investment is going to yield - larger private equity investors often dabble in every and any industry it seems - maybe, like a person having more mutual funds to spread out your risk maybe ...... so the only general rule that applies is going to be expected return on investment - how "special" you think your business is (or isn't) doesn't mean squat to people looking at the $$$ unless there is truly a differentiation.

[Stubb]

Another thing I learnt recently was if you have a bunch of long term employees the buyer will want to see your employee contracts or lack there of. If there’s no contracts protecting the employer that’s deemed as high liability and whatever the risk is will come off the purchase price.

[oilngas]

seems like it's a Private Company, then to me the most important part will be at the beginning; Did you spend the time + money to paper the arrangement to the satisfaction of both party's. If that paper is solid and clear of ambiguity, been updated over the years then I believe that will provide a base for further evaluation and discussions.

[EZM]

Another thing I learnt recently was if you have a bunch of long term employees the buyer will want to see your employee contracts or lack there of. If there’s no contracts protecting the employer that’s deemed as high liability and whatever the risk is will come off the purchase price.

Yes, that's common. In all of the acquisitions we did, any and all "liabilities" which could be long term supply contracts (ether for feed stocks or raw materials), PO obligations or contracts (where the company is the supplier under contract), employee severance contracts, stock options vested and even utilities contracts are reviewed.

You would be amazed what level of detail some of these companies go through. I've even seen one where the age of the employees was evaluated to try and see how much training and recruitment would cost as the average age was 50+ in this company (highly skilled and experienced labor force).

Pretty much any risk falls somewhere on an extensive checklist as soon as you enter due diligence of a acquisition is looked at.

[BlackHeart]

Another thing I learnt recently was if you have a bunch of long term employees the buyer will want to see your employee contracts or lack there of. If there’s no contracts protecting the employer that’s deemed as high liability and whatever the risk is will come off the purchase price.

If there is a selling of business, which differs from a valuation.....but your concept is right.

When selling if they do a “Going Concern” (buy the shares and company existence continues) purchase, the severance liability is factored in....most times....if they are smart. There is also the purchase where they buy the assets and liabilities (maybe), and pay a price for goodwill.....but the employee liability remains with you.

Basically there are multiple ways to evaluate business value....intellectual property can be very subjective.....so no one easy answer if your just trying to gauge it.....can be a wide range of paper method valuations. But put it up for sale and that will sort it out pretty quickly.

[kippered]

what the highest bidder is willing to pay

[kippered]

Although type of industry matters, it only matters in terms of risk mitigation for the return on investment - so in layman's terms, if your industry is highly volatile, investors may be more cautious with risking more capital in that sector - unless there is a known, or predicted uptick in that sector (a pending shortage of feedstock or future capacity issue for example). If that business is "well positioned" to take advantage of this - you may get a higher multiplier.

The bottom line is what the return on investment is going to yield - larger private equity investors often dabble in every and any industry it seems - maybe, like a person having more mutual funds to spread out your risk maybe ...... so the only general rule that applies is going to be expected return on investment - how "special" you think your business is (or isn't) doesn't mean squat to people looking at the $$$ unless there is truly a differentiation.

Might not even need differentiation if there is a central bank fuelled artificially induced speculation craze for a specific industry. In other words being in the right place at the right time with the right policies