Adam Herman, Director of Consulting, CPA and Accredited Business Valuator with Mueller Prost PC, paid a visit to TNtv to discuss how a business owner can value their company for a potential sale or merger.
In part 2 of a two-part series (watch part 1 now), Herman detailed that business owners need to demonstrate earnings stability as well as upward earnings growth prior to listing their company for sale. Questionable earnings growth can indicate risk with a potential buyer.
Components of Business Valuation
He said a business valuation is based on two major components. One is future growth. It is important what you have done in the past but even more important how your company is positioned going forward. The second criteria is the risk associated with how those future earnings will be attained. The marketplace calls this “multiples”. It is outlined through a process called EBITDA, earnings before interest, taxes, depreciation and amortization. Most closely-held businesses sell between 3x to 5x EBITDA.
The math associated with creating EBITDA will yield an enterprise value of the company. To achieve true equity, however, you have to subtract long term interest bearing debt. This will yield a true net equity figure.
Calculating EBITDA can be confusing and Herman’s firm helps potential sellers sort through this maze by performing a full valuation report. They can also create a summary report for management purposes, or simply a calculation of value for those just interested in what their company is worth.
Once complete the business owner will learn a lot about their business including trend analysis, benchmarking, ratios, risk and how they stack up against their competition.
Mueller Prost has a service called X-Vision® that helps companies become a better version of themselves. They can perform the valuation function and also add controls to help deter fraud and build efficiencies to make the business more valuable.
The firm also assists those who wish to purchase a business. It includes a risk and opportunity analysis. This involves working with the potential buyer to ensure the prospective company is a good fit for their experience and needs. It can also analyze growth potential and capital needs moving forward.
Mueller Prost assists with tax structuring of a deal and financial assistance with introductions to lenders. It also recommends professional services that may be needed including attorneys and IT professionals.
Prior to closing, clients are presented with a pro forma with projected financial statements and “what if” scenarios they may encounter. The end result is a solid set of guidelines the new owner can use to ensure their business is on track from both a financial as well as operational basis.
To learn more about how to evaluate a business for purchase or sale visit www.muellerprost.com.
Read about the first half of our visit with Adam now or watch the second part of the episode below!