In addition to teaching a “How to Value a Business” continuing education course each year, I am also asked to speak to various groups of CEOs, entrepreneurs and business owners on the same subject.  Regardless of the audience, invariably, someone will ask, “Jim, this valuation stuff is all well and good, but what is a simple multiple of earnings or formula to use to value a business?”

Face it, we all love shortcuts. We learn at an early age the benefits of shortcuts: whether we cut through our neighbor’s yard on our walk to school, clean our room by stuffing our messes into our closets, or even feed our unwanted vegetables to our dog (surreptitiously under the table, of course) so we can get the dessert our mothers’ promised if we clean our plates, who can resist a good shortcut?

Today, I still use the shortcuts my high school mathematics teacher taught us to check our addition and how to quickly multiply by 25. I doubt any of us can get through the day without utilizing at least one shortcut we learned as kids. For business buyers and sellers, multiples are simply shortcuts to the valuation and/or negotiation process.

When applied properly, multiples can be used effectively as sanity or temperature checks/gauges. However, I personally would not want to buy or sell a business based strictly upon a multiple. There are always so many variables to consider when acquiring or selling a business; basing such an important decision on a simple multiple does not make sense. Take a look at the following, admittedly simple, example as a way of illustrating my point. Read the rest of this entry »

Singing In the Rain

No doubt, for the past 18 months, the current economic crisis has hung over our heads like a summer storm over the Great Plains.  We are certain it will pass, but its rains and winds can produce lasting damage for all in its path.  In times such as these, we can either seek the comfort and security of shelter, or, more aggressively, we can learn to sing and dance in the rain.

Recently, I was invited to attend a recent summit of CEOs of mid-market companies.  I heard many CEOs who literally shouted: “Now is not the time to seek acquisitions because we do not know if we have hit bottom yet,” “Banks are not lending like they once did,” “How can we consider an acquisition now when we have our own business challenges?”  These were common themes and common statements during presentations, around the lunch table, and at the bar during cocktail hour.

However, a few of CEOs, those who I will call the “enlightened elite” embraced an alternative approach, exclaiming for all who would listen: “There has never been a better time than now to make acquisitions. Read the rest of this entry »

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 »

When selling all or part of a business, identifying qualified buyers is very important to an effective sales process.  Before I go into my process I would like to share a story that involves my joining CFA in 2004 and being interviewed by a senior investment banker from our Dallas office.

When I was explaining to him my “deal experience” from the four prior years he responded, “Oh, you have been working as a business broker”  I then asked him to explain to me how he distinguished between a business broker and an M&A advisor. He stated that if the “buy-side” was an individual as opposed to a professional buyer (i.e. a Private Equity Group or Corporate Acquisition Group) he would describe the transaction as business brokerage rather than M&A.

His point was that professional buyers are in the market everyday and need very little assistance in evaluating opportunities.  The individual buyer, no matter how sophisticated they think they are, is not in the market on an ongoing basis and therefore, will be less proficient and therefore a more risky prospect.

With that introduction, since joining CFA I no longer deal with individual buyers.  My concentration tends to focus on Read the rest of this entry »

A February 19th article in Private Equity Professional Digest titled The Resilient Middle Market Delivers Again: Deal Volume and Valuations Held Steady in Q4 points out that “middle market deal volume and valuations held steady from the third quarter to the fourth quarter of 2008, but the economic crisis severely impacted debt levels, which declined dramatically, according to GF Data Resources (GFDR), a proprietary database that collects data on private-equity transactions valued between $10 million and $250 million.”

In its Q4 report GFDR identified several trends regarding the current state of the market that lower middle-market business owners will want to take note of:

1. Average multiples on buyout transactions dropped from the mid-6.0x range in the first half of 2007, and have remained in the 5.8x – 6.0x range since.  Valuations have held up particularly well in the $50 million – $100 million TEV tier, where companies appear to benefit from being large enough to mitigate at least some of the risks relating to scale, but still small enough to get financing in the current credit market.
2. To measure the extent to which good companies have Read the rest of this entry »