The Steps of Valuing a Company’s Worth
The first step in the valuation process is recasting the financial information that is contained in the Federal Tax Returns. However, Buyers and Lenders understand that the Net Income on the Federal Tax Return is not an accurate assessment of a company’s true cash flow, a process known as “Recasting” needs to occur, which basically adds back into earnings non-cash expenses (Depreciation and Amortization), as well as expenses that may be discretionary (Interest, Travel, Entertainment to name a few).
Different Buyers are going to perceive different value in a business. Financial Buyers will crunch the numbers, and then depending upon their perception of the risk calculates a return needed on their Investment (ROI). If they require a 33% return on their investment, they will apply a three (3) multiple to cash flow. A Synergistic Buyer will have a lower perception of the risk. They may only require a 25% ROI on the same business and therefore apply a four (4) multiple to the cash flow.
The Balance Sheet will also become an important part of the valuation exercise. Naturally the Buyer expects to receive all the equipment and fixtures, etc. They also expect to receive sufficient working capital with the transaction such that they do not need to inject any capital into the company after acquisition. Working Capital is typically made up of Accounts Receivable and Inventory. ASG will provide an indication of the likely Working Capital requirements when we do the valuation range.
In Valuing a Company’s Worth, Experience Matters
Valuing a company properly and accurately requires constant and current involvement in Mergers & Acquisitions markets and knowing the methodology buyers and lenders are using in their own valuations. Interest rates and market conditions affect valuations, as well as lenders’ and buyers’ approaches, so constant monitoring of the day-to-day activities of the M&A market is critical. At ASG we use our 30+ years experience in the field to provide you with a complimentary valuation range for your business.
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