How do I value my business?
Let’s look first at how a buyer will approach valuation. The typical corporate finance approach to this question deploys a wide range of methods to attempt to value a business. A multiple of your EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is the most commonly used method, but others include calculations of Accounting Rates of Return (ARR), Internal Rate of Return (IRR), Discounted Cash Flows (DCF), Net Present Values (NPV) and Estimated Net Present Values (ENPV).
Some sectors have their own market-specific valuation criteria: utilising prescription (script) numbers in pharmacy company sales, for example, or multiples of fee income in insurance. In software/SaaS business sale transactions, value may be influenced by a multiple of Annual Recurring Revenue (ARR), or Monthly Recurring Revenue (MRR).
Every industry sector will have a comprehensive set of metrics that buyers like to use to benchmark businesses against each other
All valuation methods have their own strengths and weaknesses. In practice, the only true way to value a business is to approach a range of potential buyers and ask them what value they would place on your business. They are the ones willing to buy it, so their opinion must feature highly when considering your options.
By understanding the precise tools buyers may deploy in arriving at their valuation, you can position your business in the best possible light and help buyers to revise and increase their valuation from a technical and financial perspective. Having a strong financial reporting system that focuses on delivering timely and accurate trading updates can be fundamental in supporting your business story.
Understanding value drivers
Every industry sector will have a comprehensive set of key metrics or Key Performance Indicators (KPIs) that buyers like to use to benchmark businesses against each other. A business that knows and understands these metrics will be more successful, and therefore more attractive to prospective buyers. Being able to demonstrate that understanding through clear reporting and controls can be pivotal in securing a premium value for a business.
At BCMS, we believe that a strong understanding of the financials of a business can only be truly leveraged if you also understand why that business is exceptional, either in its sector or because of its future potential – or ideally, both. Making sure that you speak to the right interested parties, giving them the right information, and building the right relationship, is key to combining those factors for a great outcome
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