Business for Sale Insights - Business Valuation Planning


Reasons for Valuing a Business


Buying or Selling a Business
The business owner and the business seller must complete business valuations independently before a business for sale transaction.

Raising Money / Refinancing
Traditional bank financing or private equity lenders require business valuation. Lenders, investors and strategic partners need to know what the business is worth along with the repayment schedule.

Mergers & Acquisitions (M & A)
Both businesses involved in the M&A transaction must know and agree on a business valuation to create an optimal deal structure that works for both parties.

Bringing in or buying out a Partner / Investor
Business valuation is necessary before bringing in a partner to structure a deal and to create a term sheet. All partners must be aware of the businesses value and the value of their shares when a company restructures.

Tax & Estate Planning
Federal or regional governments provide tax exemptions or incentives to small businesses. Valuing a business is one way a business may be able to qualify for capital gain exemptions or other government benefits.

Keeping score of value created
Keeping track of value created allows the business owner to make changes continuously to maximize value. Additionally, it allows business owners to keep track of valuation for retirement.



Business for Sale Checklist


Below are some of the documents Businesses should line up valuation and due-diligence.

  • Financial statements for 3 to 5 years
  • Corporate tax returns for 3 to 5 years
  • Inventory items and value
  • List of capital expenses on fixtures and equipment
  • List of all employees and customers
  • List of professional advisors including lawyers, accountants, bankers, insurance and others
  • Copies of all leases, franchise agreements (if applicable)
  • Non-Disclosure Agreement and other Confidentiality agreements for the buyer



Informal Valuation for Small and Medium Businesses using Public Market Data


Businesses must conduct formal valuation before buying a business, selling a business or merging with another business. However, business must also value their company one or two times a year to keep track of progress and for planning. Informal valuations may be completed internally by the owner or his delegate.

The secret sauce for any valuation is coming up with a valuation multiple. Rule of Thumb valuation is one approach to determining a multiple for your business. Rules of thumb are established from previous business sales. Businesses can get the rule of thumb for an industry from the respective industry association or a business broker who specializes in the industry. For example, Grocery stores are valued at 15% of annuals sales + inventory. However, many times the rule of thumb is not easily available or does not exist. Businesses may also not want to use rule of thumb for valuation. Another approach, discussed at length in this post, is to use market based multiples for valuation. In such cases valuation can be based on publicly traded companies within the same industry.

Enterprise Value (EV) is a commonly used for valuation. Conceptually, Enterprise Value is the take-over the value of a company. It is the net amount of cash required to acquire a business. In the event of a buyout, the acquirer takes on the debt and the cash in the business. So, Enterprise Valuation can be calculated using the following formula.

EV = Market capitalization + Debt + Minority Interest + Preferred Shared – Cash

EBITDA (Earnings before interest, taxes, depreciation, and amortization) is fundamental to valuing a business. EBITDA is a rough estimate of a businesses Free Cash Flow (FCF) and is the most commonly used metric for business valuation. Smaller businesses tend to use Sellers Discretionary Earnings (SDE) for valuation, which is also derived from EBITDA.

Once a business calculates its EBITDA the business value can be calculated by multiplying EBITDA with the Market Valuation Multiple. Market valuation multiple by industry is listed in table below. The following steps and assumptions were used to calculate the market multiple:

  • US public company data has been used to calculate the multiple as such the data may not be relevant in other countries.
  • Data is used in the calculation is from 2nd-Jan--2013.The EV / EBITDA multiples may have changed in the last few months.
  • All public companies have been classified by industry.
  • Step 1: Calculate EV / EBITDA for each company in the US (includes NYSE and NASD).
  • Step 2: Calculate the average EV / EBITDA for each industry.
  • Step 3: Public companies are much larger and demand a premium. So, we have discounted the multiple by 25%, 33% and 50%. The table includes the original values as well, so you may discount it by a different amount for you industry.
    •  

      Market Valuation Multiple

      Industry

      EV / EBITDA

      (EV / EBITDA) Discount 25%

      (EV / EBITDA) Discount 33%

      (EV / EBITDA) Discount 50%

      Precious Metals

      11.370

      8.528

      7.618

      5.685

      Financial Svcs. (Div.)

      14.660

      10.995

      9.822

      7.330

      Natural Gas Utility

      9.960

      7.470

      6.673

      4.980

      Public/Private Equity

      6.750

      5.063

      4.523

      3.375

      Shoe

      7.130

      5.348

      4.777

      3.565

      Investment Co.

      15.720

      11.790

      10.532

      7.860

      Retail/Wholesale Food

      7.360

      5.520

      4.931

      3.680

      Packaging & Container

      7.200

      5.400

      4.824

      3.600

      Entertainment

      12.610

      9.458

      8.449

      6.305

      Trucking

      9.410

      7.058

      6.305

      4.705

      Metal Fabricating

      8.350

      6.263

      5.595

      4.175

      Heavy Truck & Equip

      9.530

      7.148

      6.385

      4.765

      Semiconductor

      16.220

      12.165

      10.867

      8.110

      Household Products

      11.750

      8.813

      7.873

      5.875

      Auto Parts

      13.100

      9.825

      8.777

      6.550

      Engineering & Const

      13.240

      9.930

      8.871

      6.620

      Reinsurance

      3.310

      2.483

      2.218

      1.655

      Metals & Mining (Div.)

      16.270

      12.203

      10.901

      8.135

      Air Transport

      5.960

      4.470

      3.993

      2.980

      Electric Utility (East)

      9.210

      6.908

      6.171

      4.605

      Electrical Equipment

      17.900

      13.425

      11.993

      8.950

      Retail (Hardlines)

      9.340

      7.005

      6.258

      4.670

      Office Equip/Supplies

      6.340

      4.755

      4.248

      3.170

      Petroleum (Integrated)

      5.080

      3.810

      3.404

      2.540

      Water Utility

      10.730

      8.048

      7.189

      5.365

      Petroleum (Producing)

      14.980

      11.235

      10.037

      7.490

      Retail (Softlines)

      11.050

      8.288

      7.404

      5.525

      Beverage

      17.550

      13.163

      11.759

      8.775

      Railroad

      11.020

      8.265

      7.383

      5.510

      Wireless Networking

      15.640

      11.730

      10.479

      7.820

      Electric Util. (Central)

      10.210

      7.658

      6.841

      5.105

      Pharmacy Services

      11.760

      8.820

      7.879

      5.880

      Advertising

      5.380

      4.035

      3.605

      2.690

      Furn/Home Furnishings

      7.950

      5.963

      5.327

      3.975

      Retail Automotive

      12.090

      9.068

      8.100

      6.045

      Insurance (Prop/Cas.)

      4.240

      3.180

      2.841

      2.120

      Toiletries/Cosmetics

      9.480

      7.110

      6.352

      4.740

      Steel

      10.320

      7.740

      6.914

      5.160

      Telecom. Equipment

      19.450

      14.588

      13.032

      9.725

      Bank (Midwest)

      4.590

      3.443

      3.075

      2.295

      Telecom. Services

      9.160

      6.870

      6.137

      4.580

      Telecom. Utility

      5.670

      4.253

      3.799

      2.835

      Bank

      4.590

      3.443

      3.075

      2.295

      Oil/Gas Distribution

      18.060

      13.545

      12.100

      9.030

      Building Materials

      21.240

      15.930

      14.231

      10.620

      Power

      19.300

      14.475

      12.931

      9.650

      Electric Utility (West)

      8.300

      6.225

      5.561

      4.150

      Cable TV

      7.430

      5.573

      4.978

      3.715

      Healthcare Information

      25.140

      18.855

      16.844

      12.570

      Oilfield Svcs/Equip.

      13.070

      9.803

      8.757

      6.535

      Entertainment Tech

      13.850

      10.388

      9.280

      6.925

      Semiconductor Equip

      7.680

      5.760

      5.146

      3.840

      Hotel/Gaming

      16.440

      12.330

      11.015

      8.220

      Retail Store

      8.930

      6.698

      5.983

      4.465

      Maritime

      14.740

      11.055

      9.876

      7.370

      Coal

      5.850

      4.388

      3.920

      2.925

      Thrift

      4.390

      3.293

      2.941

      2.195

      Publishing

      6.090

      4.568

      4.080

      3.045

      Recreation

      15.070

      11.303

      10.097

      7.535

      Chemical (Basic)

      7.290

      5.468

      4.884

      3.645

      Chemical (Diversified)

      9.440

      7.080

      6.325

      4.720

      Electronics

      13.170

      9.878

      8.824

      6.585

      Foreign Electronics

      4.460

      3.345

      2.988

      2.230

      Human Resources

      10.380

      7.785

      6.955

      5.190

      Computer Software

      38.060

      28.545

      25.500

      19.030

      Food Processing

      11.200

      8.400

      7.504

      5.600

      Med Supp Invasive

      25.060

      18.795

      16.790

      12.530

      Newspaper

      8.330

      6.248

      5.581

      4.165

      Educational Services

      4.760

      3.570

      3.189

      2.380

      Industrial Services

      20.230

      15.173

      13.554

      10.115

      Automotive

      8.290

      6.218

      5.554

      4.145

      R.E.I.T.

      10.460

      7.845

      7.008

      5.230

      Insurance (Life)

      7.330

      5.498

      4.911

      3.665

      Pipeline MLPs

      15.630

      11.723

      10.472

      7.815

      IT Services

      20.350

      15.263

      13.635

      10.175

      Chemical (Specialty)

      11.380

      8.535

      7.625

      5.690

      Funeral Services

      11.670

      8.753

      7.819

      5.835

      Internet

      35.070

      26.303

      23.497

      17.535

      Information Services

      22.140

      16.605

      14.834

      11.070

      Natural Gas (Div.)

      14.550

      10.913

      9.749

      7.275

      Medical Services

      12.410

      9.308

      8.315

      6.205

      Securities Brokerage

      6.020

      4.515

      4.033

      3.010

      Machinery

      12.120

      9.090

      8.120

      6.060

      Restaurant

      9.34

      7.01

      6.26

      4.67




Disclaimer: BuySellBusinesses.com provides business for sale classifieds. All business for sale and other business opportunities are not an offering or purchase recommendation by buysellbusinesses.com. We rely on the accuracy of the content submitted to us by business owners and intermediaries representing business owners. A business buyer must seek the advice of a Business Broker or Business Professional such as a lawyer, financial consultant and accountant before closing the deal. Please review our Disclaimer for more details.

 
Buy Sell Business Facebook Buy Sell Business Google Plus Buy Sell Business twitter rss Contact Us Buy Sell Business Pinterest   
  
Legal | Privacy Policy | Mobile
Glossary | Help  | Business-Brokers  

Copyright © 2019 - Connectsoft Corporation.