We recently read a nice article from Charlene Finerty on advice for selling a business. In many regards, she was spot on! We have a few more thoughts from a valuation perspective.
Ms. Finerty astutely points out that while business owners regard their companies like snowflakes (a saying we are sure to borrow in the future), valuators, bankers, and buyers will often aggregate that business into an industry group. And that’s the point that we’d like to drill down on.
Businesses are indeed unique creatures. But in order to have a starting point in answering “what’s it worth?” we do indeed start from the industry point of view. From there we try to answer the question “How is it different?”
There’s a solid chance that you are exactly like your peer group. There’s also a pretty good chance that you are above or below the mean. What we really want to understand is how much you are different than average.
To illustrate, let’s use a say the mean EBITDA multiple in your widget industry is 5.0x. If your EBIDTA is 5.0, does that mean your valuation is 25x? It certainly means that the AVERAGE widget manufacturer would be 25x. But the heart of the matter is understanding how your business deviates from the average, and parsing that into a Fair Market Value. A certified business appraiser can help you do exactly this.
As a bonus tip: When your valuation expert determines a value- and that value doesn’t mesh with what you need to exit the business – the most important question you should be asking is “why am I different than my peers?” Figuring that out is the first step in exiting at a better valuation.