Do you want to sell your company or business or do you just want to know how much it's worth?

A professional and objective business valuation is a necessary component when considering the sale or purchase of an existing business. Such a document is often needed when considering the reorganization of a business, change in a shareholder or partnership agreement, a matrimonial settlement, or estate proceeding. Our experienced team will provide you with an objective and accurate valuation of your business assets and goodwill.

Valuation is quite challenging. One reason is that it’s based on the ‘type’ of company and the ‘quality’ of earnings. Growth rate, predictability, and market conditions are also significant factors. While often difficult to quantify, every input factor is critical to the valuation process.

Market Conditions

Value depends significantly on market conditions. Changes in value can occur because certain types of companies are in greater demand, or because some sectors are perceived to be more attractive by acquiring companies.

Valuation Principles

The valuation process also relies on the time value of money. As such depending on how many years of revenue and/or profits you factor into the purchase price, the longer the repayment period the less the money is actually worth. In financial terms, the value of any business is the present value of the future income stream the company will generate. The present value calculation factors in the ‘discount’ that someone would pay today for a stream of income in the future.

Profitability

Valuation gets even more interesting when the company and its business model have yet to be proven in the market long enough to establish profitability margins. A large percentage of the companies that are sold in the technology area has yet to reach profitability at all or are growing too quickly to generate any significant profit.

Agreeing on a value requires the buyer and seller to have a common view about what the profit margins are likely to be in the future and how fast they will grow. It’s easy to see how the difficulty in predicting these future financials can lead to wide variations in what different people think is the fair value.

Similar Companies

In practice, the challenges of developing even limited agreement around a company’s future growth rate, profit margins and predictability often make the whole financial model exercise too challenging to be useful. As a result, most of the time, both buyers and sellers resort to much simpler math based on experience with similar companies

These are used every day by professional analysts who work for stock brokerage firms. The analysts’ job is to examine individual companies and then put their current valuation in perspective by comparing them to similar companies. Through analyses like these, it’s possible to generate broadly applicable rules of thumb, or multiples, to value similar companies. The most common multiples for tech companies are the price-to-earnings ratios (P/E) and price-to-sales ratios (PSR).

Types of Companies

Mature companies, with low growth rates, can be fairly valued at P/E multiples of four to five, or a PSR of one (depending on their growth rate and profitability).

For younger companies, earnings are often non-existent or extremely volatile. In these situations, most valuations are based, at least in part, on multiples of revenue. For example, these days software-as-a-service companies are regularly valued in the three to four times revenue range (PSR = 3 to 4). This relatively high revenue multiple is thought to be reasonable because these companies have a high percentage of recurring revenue and good margins. It is also believed that market growth will enable these companies to grow faster than other tech companies.

On the other end of the spectrum are service companies that are essentially ‘body shops.’ These companies can only grow as fast as new employees can become productive. Typical examples are web design firms, management consultants, and human resource companies. These types of companies are often valued at PSRs of 0.5 or P/E multiples as low as 2 or 3. This is also partly because the revenue predictability of these types of companies is low and because they usually have small percentages of recurring revenue.

Other Factors

Every industry, and every type of company, also has its unique multiples based on key performance indicators (KPIs) applicable to that industry.

The Bottom Line:

The best indicator of the true value of the business is properly reflected in properly compiled financial statements. we can start with the financial statements from the last three years to prepare a valuation summary of your business.

Contact us today by email at ls@lesfs.ca or call us at 416-705-4870 for more information on what yours or the business you are consdering is worth.