What is my business worth? How much will someone pay me for the business I created? Until recently most body shop owners did not think of such things. But then consolidation took off and it is the buzz of the industry. As a shop owner stated to me, consolidation gives average guys who fix cars the chance to sell their business for lots of money.
In the first weeks of this year alone I have heard from scores of owners asking ‘what is my business worth’. Perhaps it is the many big deals that have been announced in the past few months. Perhaps as an industry we all really are just getting older. Or that the industry is getting more challenging. Maybe the stock market jitters have all of us concerned.
Regardless, the question appears to be on everyone’s mind.
3 Traditional Approaches
One of the first things we do when working with clients (helping them sell or helping them expand) is to perform a business valuation. Valuations are important because they set a baseline. It answers the question ‘what is my business worth’. How do you know where to start negotiations unless you know what you are reasonably worth? How do you measure success unless you know where you started?
There are three traditional ways to determine the value of your business (I discussed these methods in more detail in this article):
- Discounted Cash Flow (DCF)
- Market Multiples and Comparable Transactions
- Asset Values
By far the most commonly referenced approach is the Market Multiples and Comparable Transactions method (although savvy buyers and sellers rely on all three, plus additional metrics). Simply put, this method looks at the selling prices for other businesses in your peer group and then applies the same relative valuation to your business. So if Bob down the street sold for three times EBITDA, or 40% of Sales, you use the same metrics to estimate your value.
Every business is unique. And every business operates at different levels of profitability. There are some obvious shortcomings to this approach. When asking the question ‘what is my business worth’, comps are just a starting point.
Why Comps Don’t Work
Because every business is unique, relying solely upon comps can drastically overstate or understate your value. Unrealistic expectations can cause a lot of damage. If a buyer’s first offer is more than you ever expected for your business perhaps your comps were off. But if your expectation is twice as much as the offer, how do you know if it is you or them that is unreasonable?
Using comps effectively is dependent upon good data. Good data is tough to find in business buy/sell transactions. Rumor and conjecture by the uninformed dominate the gossip mill. The reality is that the price and terms in most deals are kept confidential.
When Comps Work Well
Comps work the best when you have an informed intermediary that has represented multiple clients in buy/sell transactions within the same industry at the table with you. Every business is unique, and every buyer is unique. Different buyers find value in different aspects of a business. Understanding how different buyers approach your business is often the difference between an average deal and a really good deal – for both parties.
Comps also work well when a seller can frame the business in the appropriate context to justify the comps. Again, this is where industry experienced advisors come into play. For example, a buyer may only entertain acquisitions of companies that meet certain rent factor thresholds. Knowing those thresholds in advance can be the difference between closing a transaction and never receiving a call back after exposing sensitive information to your competitor.
What Not to Do
Many people assume that the best way to answer the question ‘what is my business worth’ is to pick up the phone and call a likely buyer. Another common approach is to ask a jobber or paint rep about recent transactions. Both approaches are fraught with risk.
Business buy / sell transactions are best managed confidentiality. Rather than revealing sensitive information to a potential competitor or trading partner, a much safer approach is to have a confidential valuation completed on your business by a team experienced in transactions in your industry. Reputable buy / sell advisors sign non-disclosure agreements before any sensitive information is exchanged. Since valuation is a key component of any transaction, some advisors will provide an initial valuation range at no cost.
If you are interested in understanding your valuation I can help. (Subscribers email me direct, or use my contact page). If you are considering a sale, now is a good time to discuss how to maximize both your price and terms (price is just one of many considerations in a transaction). But if you’re still unsure what to do next that is OK. Use my contact page and we can brainstorm some ideas together, confidentially of course.
Until next week.