Another look at “Valuation: Getting the Right Price When Selling Your Business”, an article by Gary Parker.

I think Gary has done an excellent job of summarizing the valuation process. However, I feel that he and many others that have written about “valuing” your company have made the explanation too complicated or mysterious.

This writing is an attempt to simplify the explanation of this process and to provide a conclusion that hopefully gives potential clients more comfort that professional “intermediaries” like CFA can provide very reasonable estimates of what their company will be worth.

I am “certified” by NACVA (National Association of Certified Valuation Analysts), which required a great deal of study, testing and experience and as such, I feel I have learned to navigate the valuation “maze” more effectively.

The first and in many respects the most important question of a valuation is “what is its ‘purpose?’” While there can be many reasons for a valuation, the purpose for our clients is the sale of their company (all or part) and as such we will be using the Fair Market Value Approach. This is defined to mean “willing buyer, willing seller both acting with the same information and no compulsion to act”. While academic it is very practical when combined with the market experience of professionals like CFA that have seen hundreds of transactions during their careers. I will only say that other “purposes” such as estate planning will use different approaches, which lead to different methods mentioned in Gary’s article.

The second important point is Read the rest of this entry »

Middle Market investment banking activities felt the effects of the financial crisis.  M&A deal volume for the middle market fell 39 percent in 2008 compared to 2007 and has fallen even further into 2009.  The harsh credit markets have left their mark on the middle market.  The average deal value in Q1 2009 was $64.1 million, down from $93.4 million in the fourth quarter of 2007.  The decrease in average deal size can be accredited to conservative valuations due to the added risk and limited debt funds available.  The incentive for an owner or principals to sell their business has sharply decreased and left many waiting for a more optimal, but indefinite exit timeline.

Traditional business models and financial investments have lost effectiveness, allowing a higher demand for alternative strategies and investments.  Private Equity groups are tentative to invest because of the risk coupled with difficultly accessing debt to leverage the scale of their investments.  An alternative investment like a Management Buyout (MBO) presents an appealing opportunity to private equity. Why? Read the rest of this entry »

For companies with valuations less than $100 million, deal volume for the first half of 2009 was down 58% compared to 2008 as reported by the Alliance of Merger & Acquisition Advisors (AM&AA).

Those numbers don’t sound like good news for company owners who are ready to sell their companies, but that’s past.  The question is, what is coming?

While the history is dark, the silver lining is in the external market factors, like these:

• Strengthening public stock market values are waking up strategic buyers who need to make acquisitions to grow
• Low buyouts over the last 18 months mean that private equity investors are more hungry than ever to put their $400+ billion of uninvested funds to work by doing deals
• It is beginning to look like the worst of the recession may be behind us
• Valuation multiples, reported by AM&AA at 4.7X EBITDA can only go up

The market for under $100 million companies has always been cyclical.  This may indeed be the bottom and we are in the beginning of the upswing.

posted by John Hammett