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Do you know your business value?

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If you own or manage a midsize business, do you really understand the value? Right now? Do you know for sure how much value you have created in the past year? Can you identify where your business is creating value and where it is declining?

If the answer to any of these questions is no, you may be putting your company’s future at serious risk.

One of us (Reed) recently advised a family-owned company that operates three different business units, each in a different industry. Two of his units were doing well in promising industries, but the third had an all-time low valuation and was lagging behind in a struggling industry that was unlikely to recover. I was. Unfortunately, management focused on fixing struggling businesses instead of spending more time and energy on making better-performing businesses better.

The damage done by this approach became apparent only when the company was sold. The sale involved three separate buyers, as the three business units belonged to different industries. The top performers earned about $75 million each. The struggling business — which had a lot of their attention — made just $12.5 million.

Imagine what the value of the combined company would be if management focused on businesses worth improving by investing in creative talent and innovation, expanding the customer base, fine-tuning quality, etc. Try it. In a few years, a targeted growth strategy might bolster an already promising business so that buyers would be willing to pay a 25% premium, or $100 million, instead of his $75 million. not. Even if those investments had required him to close a third business, the combined $50 million increase in market value would have more than compensated for the cost of closing a bad business.

Any company can make this type of error, but family businesses can be at greater risk. Their rich history and traditions (usually one of their most powerful assets) can become a liability when leaders cling too long because of emotional attachments or resist accepting new directions. may become. For such companies, a clear and objective assessment provides an essential reality check.


Unfortunately, most owners and managers of medium-sized privately held companies (both family-owned and non-family-owned) operate day-to-day without a clear understanding of their value. Busy executives often put the topic aside, assuming there is no easy way to determine value. Unlike publicly traded companies, they do not have the advantage of being automatically valued daily based on their share price. Nor is there a team of corporate strategy officers standing by to analyze value creation. Many midsize business leaders find third-party assessments complex, time-consuming, intrusive, and costly. So do them only when necessary, such as when seeking capital for growth.

Despite these challenges, if you own or manage a medium-sized business, it is imperative that you conduct a detailed assessment at least once a year. Think of it like an annual health check-up. This is an important step in knowing what is working and, more importantly, what is not. Corrective action can then be taken before it is too late. You can sell valuable resources to the wrong customers, try to expand inevitably declining business areas, and avoid recognizing and investing in areas of greatest opportunity. In addition, we are ready to respond and negotiate if a buyer who is interested in acquiring your company contacts us. Instead of relying on the vague “X times EBITDA” numbers you heard at the last industry conference, you have a clear picture of what is what. your Companies—they’re not the only ones favorite Your — value and why.

A more accessible evaluation method

We have created a new methodology called QuickValue to make it easier and more approachable to conduct assessments. It is based on the experience of our leads who have worked directly with hundreds of midmarket leaders and helps them better understand what their companies value and why. Internal teams do not need future financial projections to do so. Most of what you need is at hand, and what you don’t have is easy to get. Your executives know the business better than any consultant, so there’s no need to push anyone up the learning curve.

Our approach to this exercise focuses on a close analysis of your company’s most important value drivers – the characteristics that make your business unique. Companies with similar metrics in the same industry can vary widely in everything from quality of leadership to pricing power to brand equity. Therefore, a careful, thorough and honest assessment of these value factors is essential in calculating the value of an individual company.

First, identify the value drivers that matter most to your business (we recommend picking 8-12). Then rate each with a score from 0 to 10. 10 is the best to make a value driver score. This score forms a key component of the assessment as it quantifies a qualitative aspect of the business that most other assessment methods ignore. You and your team then use multiples of the listed company’s market rate to value similar companies. Finally, private midsize companies need to adjust for the lower multiples of M&A deals involving private companies (typically 25-30% lower).

The next step is to put everything together. It takes quite a bit of work to get his three key pieces of data: value driver valuation, EBITDA multiple, and his EBITDA adjusted. Support your business value.

This evaluation process allows us to:

  • Avoid selling your business at a discount to its true value.
  • Focus on how you can improve your company by enhancing your value drivers.
  • Create a strategic plan centered around value creation.
  • Incentive employees based on the value they create, rather than using revenue or EBITDA targets.

how to know your worth

Consider the following hypothetical example. Company X has received a takeover offer from a competitor. Competitors say pricing is based on 12x EBITDA, a widely used industry multiple. Both companies are in fast-growing industries and are performing well.

Luckily, Company X’s manager recently completed a self-assessment of the company’s value and believes he has strong justification for valuing the company at 18x ​​EBITDA instead of 12x.

how did they get there?An in-house team of four senior executives covering core areas Finance, Products, Marketing, Manufacturing Together we discussed which value drivers are most important. By eliminating factors that do not apply to the software business, such as supply chains and franchisor-franchisee relationships, the team determined that areas such as intellectual property, leadership, and pricing power were most important to development and success. Did.

We then rated each driver using a scale of 0 to 10, giving special emphasis to drivers we thought were particularly important. It was a lively, candid, and clear conversation. They took care to judge themselves thoroughly, including both good drivers and inevitable drivers who needed improvement. Reached an overall score of 112. Only ten value drivers were evaluated by the team, but one was considered important and received a triple weighting (potentially 30 points) and two were considered very important and received a double weight. Received a weighting (20 points) and the remaining 7 had a normal 10-point weighting. Using our system, they got his 80% value driver score (112 points divided by 140). This is a very high score given only to the best companies.

Next, they looked at the EBITDA multiples of 15 public companies in Company X’s industry. (In this case, an investment banker they know provided us with this information, and there are several ways to gather it quickly.) This has allowed us to develop a range of valuations. I have since revised it down slightly to account for the difference between publishing and publishing. M&A ratio of private companies. The 10x to 20x EBITDA range is where Company X finds its value when the scores are applied. As you can see in the table below, the company’s strong score places it at the high end of the EBITDA range, at 18x.

If Company X were acquired at the price offered by its competitor, it would have been a bargain for the buyer. This is because companies selling at 12x his EBITDA score much lower.

By not accepting the offer, Company X dodged a bullet. His EBITDA of $10 million valued the company at $180 million (18 times EBITDA), which is $60 million more than he was offered.

It should be noted that the fictional story above highlights the best case scenario. Not all companies guarantee such laudable scores. Exaggerated self-esteem is quickly spotted by buyers during due diligence. More importantly, self-deception is counterproductive to the very idea of ​​this exercise. It’s certainly disappointing if an honest evaluation results in lower value for your business. But it’s valuable information that you can use to move forward to make your company stronger.

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