Here at Awad Capital we meet a lot of entrepreneurs that have started their businesses from scratch, worked hard and turned their companies into a thriving success.
There comes a time when every entrepreneur will consider what he or she wants to do next. Succession planning, expansion, raising capital or bringing on a new Partner in order to reach out into new territories and diversify operations, or a potential exit through a sales process. This all leads to a very interesting question around how much your Company could be worth. Although there is no scientific answer to this – a company is only worth what a buyer is willing to pay for it, I have seen deals of what are good marketable businesses, fall at the wayside when an entrepreneur’s perception based upon his emotional involvement in creating his Company and its worth to him or her has resulted in a significant divergence from the broader market perception of Valuation.
A good starting point in valuing your Company involves looking at the market and benchmarking your business against similar ones, getting a feel for how they are valued. Now you might say, we are unique, there are no comparable companies so we can not do this. From my experience, most investors will not think like this. Yes, you might be unique but anyone looking to buy into your business will still look at the broader market and sector in which you are operating and at least draw some comparisons over how others are trading vis-a-vis you, in order to assess what they are willing to pay.
So how should you benchmark yourself? In valuation terms, there are many approaches and one commonly used involves a ‘Market based methodology.’ This involves looking at transactions for Companies that are in a similar industry to you. Although not without its limitations, this can form a very good starting point in beginning to feel and judge where potential investors thoughts may be on value. A review of publicly listed companies and their trading multiples will also provide you with some initial benchmarks. The analysis will often indicate a broad range of data points and in many cases, can serve to help provide a view of what a potential ‘ceiling’ on the valuation of your Company may look like. Most sellers will appreciate that market leading companies out there trade at a premium for a reason and if you are looking to sell, then you need to ask what you have to offer and where this places you in the pecking order of multiples observed.
So you’ve looked at the market and found some interesting data, you begin to get a broad feel for where you believe your Company valuation may reside. What’s next? Having performed business valuations for hundreds of Companies over the last 15 years, one of the greatest errors you can make is form a judgment based solely on only looking at one approach. Best practice involves looking at as many benchmarks as possible and applying different approaches to ensure your business valuation ‘feels right’ not just on one metric or technique but on multiple levels.
Only by going through a disciplined exercise and removing emotion from the equation, can you really begin to start assessing where a potential buyer may be for your business if you are looking to sell your Company. In some cases this may justify investing the significant time and effort to go down a Sales process. In other cases, this initial analysis may help you draw the conclusion that perhaps an outright sale is not the best route for you and perhaps value can be optimized more effectively by considering other options that don’t involve you giving up what you have worked so hard to build in the first place.
February 19, 2015
Jagdeep Singh Kang
Head of Corporate Finance