Why Are Business Valuation Methods So Confusing?
Gavin Gibbons
Private Investor | Adviser & Partner On Scaling Your Business To Exit | Mergers & Acquisitions | Managing Partner at Next Level Ventures
As a mergers & acquisitions specialist and business investor, I often meet owners planning to sell their businesses within the next couple of years.
One common question that frequently arises is: "Why are business valuation methods so utterly confusing?"
In my personal opinion, some of the more exotic methods are particularly frustrating, since most valuations are ultimately decided by two things.
One is what the owner wants for it. The other is what someone is prepared to pay for it.
But the reality is that there are numerous ways to value a business, which can be overwhelming for owners. Some methods will simply be used as a way to justify a specific number the owner has in mind.
This article aims to clarify various business valuation methods and provide guidance for SME owners navigating what can be a complex process. It’s worth stating that a conversation with an M&A specialist can make all the difference in reaching the best possible valuation and outcome when the time comes to sell.
Valuation Methods
Each business is unique, which is why multiple valuation methods exist. These methods accommodate the specific characteristics of each business and are influenced by factors such as financial performance, industry trends, and even the owner's personal preferences.
Here are several popular methods, including those cited in Harvard studies:
+ Asset-based approach
+ Income-based approach
+ Market-based approach
+ Discounted cash flow (DCF) method
+ Multiples method
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+ First Chicago method
+ Venture capital method
+ Real options valuation
+ Economic value added (EVA)
Choosing the Right Method
Deciding on the appropriate valuation method depends on the nature of the business, its growth potential, industry dynamics, and the owner's objectives. Nine times out ten, business owners of established businesses choose a multiple of EBITDA as the justification of the payday they seek. And nine times out of ten, the multiple they select is higher than the average for their sector!
Assessing Your Business's Unique Characteristics
It is important to understand your business's strengths and weaknesses, financial history, and growth prospects. This assessment allows you to identify the valuation methods most suitable for your business and in the end, ensures an objective and fair valuation.
Maximising Business Value
By working together, we can develop a strategy to maximise your business's value and attract the right buyers. This may involve improving financial performance, enhancing operational efficiency and identifying potential synergies with buyers. It’s likely there will also be the opportunity to grow your business inorganically, through acquiring other businesses along the way.
If you're an SME owner planning to sell your business in the next 2-4 years, don't hesitate to get in touch with me.
Feel free to connect with me here on LinkedIn or drop me a message…
Business Growth Architect | Maximising Business Value & Transitioning Owner-Managers to Owner-Investors | M&A & IT Optimisation Specialist
1yGavin Gibbons that’s a great topic. Many models available to value a company. At the end of the day probably as part of the DD. A third party should value it based on a model. Once again no standard model used across the board or sector specific. The best model seen so far what some one is willing sell and what someone is willing buy for.
Content Lead
1yThe problem is they often involve making assumptions about the future.
Diamonds are made under pressure. It's when things get hard that great opportunities are made possible.
1yThere's no standardization.
Food & Beverage Director at Two Seasons Hotel
1yIt's not just business owners who find them confusing - investors and buyers also struggle to make sense of them.
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1yPeople pick the one that gives them the highest number!