Valuing a business requires time, patience, knowledge and know-how because there is no one valuation formula that can provide you with the correct value of your company. The best valuations are not a single number, but rather a range of value that indicates the differences in value as perceived by potential buyers. At ASG we take all the time needed to provide you with this business valuation range based on all the information available to us… and we do this at no charge to you!
The first step in the valuation process is recasting the financial statements. For all of you non-accountants out there, recasting is done to find the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Basically, all of the amortizations, income taxes, excess owner compensation, nonessential interest, owner's and discretionary expenses, and depreciation are added back into the reported earnings. Then, interest income, understated expenses and the like are deducted from reported earnings. The resulting number (after the additions and deductions) is EBITDA, a common financial acronym used to describe profit before taxes.
The EBITDA (also known as stabilized earnings), as well as potential buyers’ desired ROI (Return on Investment), is used to develop a range of value for the company. Of course requirements for ROI vary significantly from buyer to buyer, as well as by industry and size of the company, which affects also the valuation.
Determining the net assets is also important when valuing a business. The net assets a buyer will receive when purchasing the company, as well as the liabilities the buyer will assume, affect the value of the company and must be included in any valuation approach. Every business varies significantly in net assets, with some having significant assets and others having very few. As a result, ASG will determine what approach to use to value the business appropriately and effectively. The valuation will also be affected by the fact that more than 95% of transactions are financed, and lenders have their own requirements for valuation. ASG works to ensure that values fit the lenders' formulas so buyers will be approved for the necessary funding and successfully complete the sales transaction. Without this level of diligence, many transactions will fail.
