In recent mandates with several different clients, we have gone through the exercise of valuing their business.
A few important principles were confirmed:
- The value to the owner is unique to that individual. Ego may artificially inflate the price, but more importantly the role and relationships established by the owner may change drastically with his/her departure and thereby affect the price.
- Value is always determined by an evaluation of the future income relative to the uncertainty or risks associated with obtaining the expected returns. Regardless of the valuation method, (P/E multiple, payback period, or discounted cash flows) the forecast future income stream has to be solid and the known risks have to be reduced to get the best possible valuation.
- Current owners tolerate more risks, uncertainty and "fuzzy" circumstances than new owners/investors. You may be OK with the fact that you are dependent on one key supplier because he is an old high school buddy; or that you have no signed lease but the landlord is your uncle; or that your best sales rep is also your only son and he wants to be president. Prospective buyers will be much less enthusiastic unless those issues are all resolved to their satisfaction in advance of any offer to purchase or invest.
- Different buyers will accept different prices, terms and conditions. The prospects usually range from the passive investor looking for a reasonable return for reasonable risk; to the active investor who sees the potential to do better than your forecast under his own management; to the strategic investor who sees even greater opportunity in buying a competitor, supplier or customer and merging it with his existing business to increase revenues, eliminate unnecessary overheads, and substantially increase profits. The selling price will increase accordingly.
For more on the subject visit: http://www.directtech.ca/pricing_a_business.htm