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Business Valuation: Be Somebody

Posted by Lloyd Bell on Nov 21, 2013 11:13:00 AM

Remember the scene in the movie The Jerk when Steve Martin gets excited about the new phonebook? 

“Johnson, Navin R.! I'm somebody now! Millions of people look at this book everyday! This is the kind of spontaneous publicity - your name in print - that makes people. I'm in print! Things are going to start happening to me now.” 

While no one looks at a phone book anymore, they do look at the Alliance of M&A Advisors Deal Stats survey (don’t they?). When it hits my e-mail inbox, a small part of me says “the new phonebook’s here, the new phonebook’s here!”

You won’t find a listing for Navin Johnson in the survey, but you will find that transaction volume was down in the first half of the year after a busy 2012 as deals were closed in anticipation of changing tax laws.  Those deals that did close in 2013 tended to be at or slightly above 2012 valuations for all but the smallest (under $1 million) of transactions. According to the Alliance of M&A Advisors data, the average purchase prices were up 11% for companies valued $1 to $5 million, 2% for $5 to $25 million, and 5% for those valued from $25 to $50 million. This continued improvement is welcome news to business owners who may be considering a transaction in the near term.

Of course, these figures are based on average multiples, and these averages come from a limited pool of transactions. For every reported average of 5 times, you know there are a bunch of 3s and 7s, but what makes one company worthy of a higher multiple than another?

Much of the variance is subjective and part is the result of negotiations, but I like to know going in where the issues may lie. As a result, we use an assessment tool to identify areas of a business that help support or even justify a higher multiple while flagging those areas which require attention. While it’s not a guarantee of success, it provides a business owner the opportunity to see their business through the eyes of a buyer. Let me know if you’d like to learn more about this assessment.

I would urge every business owner, even those who have no plans to exit their business, to look at your business as an outsider would. I’d wager that you look at your brokerage statements to see how the value of your liquid investments are doing (the Merrill statement’s here, the Merrill statement’s here!), even if you have no intention of liquidating the portfolio. Shouldn’t the same be done with the business?

Download our whitepaper: "How to Value a Privately-Held Business"


Topics: Corporate Finance

Lloyd Bell

Lloyd Bell

Lloyd W.W. Bell III is Director of the Cor­porate Finance Group at Meaden & Moore. He has over 20 years of experience in financial management.