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Embracing on a Bench

Business valuation is one of the most misunderstood areas of the process in our experience. Business owners tend to have all kinds of ideas about what their business is worth that in fact make it rather complicated when in fact the simple premise for most (non asset based) business sales is that a buyer is buying....future cash flow discounted by a % which takes into account risk and ROI.

Many people know about the idea of 'multiples'. What then needs to be understood is where the multiple come from and also how to calculate the second part of the equation which tends to be Adjusted EBITDA (Earnings Before Tax, Interest, Depreciation & Amortisation with adjustments for owners benefits, one-off costs and post-sale costs to cash flow for the buyer).

Unlike accounting which is mostly mathematical and rules-based...business valuation tends to be 60% like accounting and 40% art or subjective...so there is a significant aspect that takes experience to navigate and is opinion based, generally from the lens of the person with the opinion.

Further, business sale transactions are not a single number, they are generally a collection of commercial terms from the closing payment, deferred payments, loan notes, excess cash, rolled equity, earn-outs, etc....that all need to be factored in and applied against risk factors.

An experienced business valuation/M&A professional can be very helpful to work through all the aspects of the valuation as well as work on the financial models (and negotiate) with any buyers...but it is important the business owner understands the fundamentals to participate effectively in the process and make sure they feel they are getting the right (a good) deal.

Business Valuation

Resources:

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 Chapter 3 of Selling Your Business covers Business Valuation . Click on the title for instant access or fet you free copy. 

It covers
:

  • Components of a Business Sale Transaction

  • Business Valuation Methods

  • EBITDA & 'Adjusted EBITDA' 

  • Multiples 

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