YOU SHOULD!!!....
With the day-to-day demands of running a label businesses, most owners put off getting a valuation until a sale is imminent. And then they often get disappointed. Many owners believe their companies are worth much more than they really are. But some are starting to treat the act of valuing their business as an integral part of running it.
“Everyone likes to think they’re building something that they can sell someday, but unless you focus on it, you don’t know if you really are.”
It helps to have at least a basic understanding of the valuation process. Here is what you need to know:
THREE VALUATION APPROACHES There are essentially three methods for calculating the value of a business.
The asset approach, typically used in distressed situations for the sale of defunct businesses, determines a company’s value by adding up its tangible and intangible assets.
The market approach, probably the most common way to value a healthy label business, produces a valuation based on a multiple of the company’s past earnings — usually the last 12 months of Ebitda (earnings before interest, taxes, depreciation and amortization), which is a good proxy for cash flow. If you found that the last 12 months of Ebitda totaled €1 million and you chose a multiple of, say, four, you would get a valuation of €4 million.
The income approach, is forward-looking, relying on the present value of expected future cash flow. More common in high-growth sectors like technology, this method tends to paint the fullest picture of a company’s potential, but prospective buyers may view it skeptically. That is why some people prefer a blended approach.
PICKING A MULTIPLE While multiples can vary widely, most have fallen since the financial crisis. Part of a valuation expert’s job is to analyze the multiple of earnings at which comparable businesses have been selling, to choose the appropriate multiple for your business. We have seen many deals done at multiples of 3-5 in the label industry unless there are specific circumstances impacting the value.
CONSIDER YOUR BUYER Another factor that figures heavily in the size of the multiple is the type of buyer you think might want to acquire your business. Strategic buyers — those with a vision for how to improve your business’s operations, possibly by combining it with the buyer’s operations — tend to pay more than financial buyers, like private equity funds, which focus on maximizing their returns when they eventually exit the business. For strategic buyers factors such as location and relocation, synergy, management, equipment, markets and and types of labels will impact the value to them.
GET YOUR HOUSE IN ORDER Take the buyers view. Assume he will find problematic areas and that eventually all will be discovered. Ensure neat, clean, attractive surroundings, keep machinery well maintained, clarify agreements and contracts, settle minor disputes, update relevant records, get your books in order and prepared by certified accountants, etc. Serious buyers want to buy well-run businesses, not neglected ones.
With the day-to-day demands of running a label businesses, most owners put off getting a valuation until a sale is imminent. And then they often get disappointed. Many owners believe their companies are worth much more than they really are. But some are starting to treat the act of valuing their business as an integral part of running it.
“Everyone likes to think they’re building something that they can sell someday, but unless you focus on it, you don’t know if you really are.”
It helps to have at least a basic understanding of the valuation process. Here is what you need to know:
THREE VALUATION APPROACHES There are essentially three methods for calculating the value of a business.
The asset approach, typically used in distressed situations for the sale of defunct businesses, determines a company’s value by adding up its tangible and intangible assets.
The market approach, probably the most common way to value a healthy label business, produces a valuation based on a multiple of the company’s past earnings — usually the last 12 months of Ebitda (earnings before interest, taxes, depreciation and amortization), which is a good proxy for cash flow. If you found that the last 12 months of Ebitda totaled €1 million and you chose a multiple of, say, four, you would get a valuation of €4 million.
The income approach, is forward-looking, relying on the present value of expected future cash flow. More common in high-growth sectors like technology, this method tends to paint the fullest picture of a company’s potential, but prospective buyers may view it skeptically. That is why some people prefer a blended approach.
PICKING A MULTIPLE While multiples can vary widely, most have fallen since the financial crisis. Part of a valuation expert’s job is to analyze the multiple of earnings at which comparable businesses have been selling, to choose the appropriate multiple for your business. We have seen many deals done at multiples of 3-5 in the label industry unless there are specific circumstances impacting the value.
CONSIDER YOUR BUYER Another factor that figures heavily in the size of the multiple is the type of buyer you think might want to acquire your business. Strategic buyers — those with a vision for how to improve your business’s operations, possibly by combining it with the buyer’s operations — tend to pay more than financial buyers, like private equity funds, which focus on maximizing their returns when they eventually exit the business. For strategic buyers factors such as location and relocation, synergy, management, equipment, markets and and types of labels will impact the value to them.
GET YOUR HOUSE IN ORDER Take the buyers view. Assume he will find problematic areas and that eventually all will be discovered. Ensure neat, clean, attractive surroundings, keep machinery well maintained, clarify agreements and contracts, settle minor disputes, update relevant records, get your books in order and prepared by certified accountants, etc. Serious buyers want to buy well-run businesses, not neglected ones.
