How to Evaluate the Real Value of Your Business

The Real Value of Your Business

Sometimes, when we indicate a company’s value range to the owner, he says to us: “for me it’s worth more”.

The above sentence holds a very valid point: for a business’ founder, who has dedicated his life to it, the company is like a child and he generally has inflated expectations about its value. Because of this, we recommend that if you are the seller, you need to put yourself in the shoes of the buyer. The buyer will see things in a different way and will think: “If I pay all of this for a company, how am I going to earn money?”

For many business owners their company´s value is the result of the addition of three types of value: Intrinsic value+market value+emotional value. Let´s analyze the three components:

Intrinsic value

External valuations serve to help understand a company’s intrinsic value range and often act as a negotiation tool to reach a higher range. Note that we say ‘value range’ because, although it is possible to estimate how much a company is worth, it is absurd to think that you can estimate the exact amount because it doesn’t exist. Valuation professionals always speak of value ranges.

The buyer will try to acquire the target company for its intrinsic value in that moment, according to how it is being managed, and it will be the buyer who increases its value by improving management.

Market value

Try to analyze, when negotiation with potential buyers, not only the value of the company you’re selling, but all the elements that cause an increase in value for the purchasing party.

If you find the right buyer, you might add the market value to the intrinsic value.

A buyer might reinforce his competitive strengths by creating synergies with the acquired company. Synergies let you obtain bigger margins when you are merged. Two plus two can be five.

Once you know the buyer, it is also very useful to calculate synergies, and through these calculations, know how much the company is worth for him. If we are able to negotiate well, it will let us capture a lot of the value of the synergies we find.

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Emotional value

Here comes the emotional value: we once had a buy-side mandate and the seller told us that the price for his company was six million dollars. When asked why, he told us that he had six daughters. We explained to him that we would have looked for another seller with a similar company and less daughters. It didn’t seem right to us that he would have made our client pay for his fertility.

The true value

Companies are valued based on their “profitability” and their “risk”. All the other elements end up fitting into these two concepts. If the buyer has another alternative where he can get more profit with the same risk, he will take it.

Seek a buyer with considerable liquidity for whom your company offers these synergies, without regard to where they are located. If this potential buyer perceives real value, he will pay more money for your company.

In our experience, price is usually a result of the quality of the sales process. Good preparation, well presented, clear documents, access to a good selection of candidates, proper management of confidentiality during the process and a proper negotiation of offers will maximize the price and other terms of the transaction.

The more offers a company receives the greater is the probability to find the best buyer, because more offers means greater bargaining power. Experience has shown us that a well-managed well-worked sales process has a tremendous impact on the final price and conditions of a transaction.

By selling your company you are converting years of work and effort into value and, in a short space of time, you can potentially create or destroy a lot of its value. It is in your hands.

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