Valuing the business – a reality check

Death and taxes, an inevitability.

The value of your business only becomes relevant when you either wish to sell it or when you pass away.  Whether you live in the US with its estate tax or in Canada with its deemed capital gains tax, your heirs will pay some taxes upon your passing.

Your objective, despite these future inevitable taxes, is to maximize shareholder value for the family.  What range of multiples are being paid for private businesses.  In 2006 and 2007, when there was a flurry of merger activity and credit was much easier, the multiples were 7 to 10 times EBITDA for well run companies.  EBITDA = earnings before interest, taxes, depreciation and amortization.  By comparison, some publicly traded companies, were trading at multiples of 15 + times.   Why?  Because there was a liquid and ready market to sell the securities of these public companies.  Private businesses are not so liquid.  Unfortunately, today due to the tighter credit conditions and poorer economic climate, the multiples for private businesses are more in the range of 2 to 5 times EBITDA.

Essentially EBITDA approximates the cash flow from operations generated by the business.  Like a bond, the measure of value of a business was the cash flow that it generated.  The multiple assumes, at a minimum, that this cash flow would continue year after year.

As a private business, how can you increase 1) your EBITDA and 2) the multiple that would be paid for your business.  This is the stuff of consultants and experienced business people.  One process undertaken by a business colleague of mine, Mark Wardell, has as its goal, methods and coaching to increase both EBITDA and the multiple for the business.

http://www.wardell.biz/?pageKey=business-advisory-system

or take their business strength test here….(link below)

http://www.wardell.biz/files/File/wardell_businessstrength.pdf

In order to maximize the value of your business, you really have to work on both EBITDA and the multiple.

Learn, think, apply!