There are many complex formulas in expensive business valuation software that spit out reams of data on the value of a private business. This data is certainly interesting and can be helpful in determining price expectations but this is an inexact science, at best. While this valuation approach is necessary and helpful when there are estate issues or legal issues such as buy-sell disputes the only answer is that a business is worth what a buyer is willing to pay at the time the business is for sale.
To formulate a ballpark answer to this question the following would be helpful:
- Who is the buyer?
- What is the buyer’s motive?
- What is the buyer’s experience in making acquisitions?
- What is the buyer’s financial strength?
- What is the buyer’s concern with their competition for this purchase?
- The Buyer’s recent acquisition activity in this type of business.
- Are there many similar companies available to purchase?
- What are the future growth opportunities of the company?
- Proprietary products?
- Barrier to entry?
- Management post-sale?
- Is there competition or perceived competition on this acquisition?
Does the business’ representative have a large database of potential acquirers?
Of course, private businesses are not often publicizing their sale price so it’s rare that there is a comparative sale to review. Even if this information were available the question would be does this buyer want to buy another company? Is buyer more or less motivated to buy another company? How about the unsuccessful potential buyers – are they more motivated now to increase their valuation? Comparing a private business’ value to a public company in the same line of business seems a stretch as larger businesses trade at significantly higher multiple and the same can be said for publicly traded ones.
So, the answer…… “you need a good representative to properly present the company to facet of the buyer market that would likely have an interest in the company and wait and see. However, this representative should be able to provide an accurate complimentary valuation range that can be used to determine if the owner is now a seller”, per Emmett Barnes, President of The Montana Group (www.montanagroup.com).
