Can You Give me a Quick Opinion of the Value of my Business?
Can you review my financials and provide a brief estimation of value? I’m not looking for a formal appraisal or valuation. I simply need a quick figure. With your evident expertise, I’m optimistic you can assess my business and offer a rough estimate of its worth. Is this feasible?
Valuing a business involves both qualitative and quantitative considerations. It’s not possible to glance at a profit and loss (P&L) statement—a quantitative aspect—and accurately gauge a company’s value within a few minutes. Conducting a thorough assessment of potential values for a company demands time due to the myriad factors at play.
Understanding a company’s value necessitates analyzing its standing in comparison to others within its industry. Both the growth prospects and risk factors of a business are vital to comprehend. Even a seemingly minor factor—like a new competitor or consistent revenue growth—can sway a company’s value by up to 50% or more.
In my earlier career, I used to provide free opinions of value. However, I soon realized that this wasn’t beneficial to business owners. As the saying goes, you get what you pay for. In these instances, all I could offer were educated guesses, much like tossing a dart at a board—I hit the mark about half the time and missed entirely the other half.
Why? The lack of compensation for my time meant I couldn’t delve deeply into understanding the businesses and their industries. The valuation of a company involves many considerations and queries.
For instance, consider a scenario where an owner claims their manufacturing business generates $1,000,000 in EBITDA. It might seem straightforward—many manufacturing businesses sell at a 5.0 multiple, indicating a value of around $5 million. However, this example is riddled with complexities.
What if the top three customers contribute 70% of the revenue? What if revenue has consistently declined by 5% annually over the past three years? What if it’s growing at 20%, 30%, or 40% per year? Are gross margins decreasing? Has the recent revenue increase been due to relaxed credit policies? Does the business heavily rely on the owner with no management team in place? Are key employees unwilling to remain? Is the industry experiencing a downturn? Has a well-supported competitor recently entered the scene? Does the owner demand an all-cash payment? Is revenue unpredictable? Is EBITDA inconsistent? Is there deferred maintenance? And the list goes on.
Numerous questions, and we’ve got answers. To gain insight into our approach toward business valuations, read further.
Our Process for Valuing a Business
Valuing a company involves analyzing numerous factors. This comprehensive assessment allows us to provide an objective opinion on its value. Initially, with limited information, we can typically estimate the value within a range of 30% to 50%. However, it’s crucial to note that this range only extends in one direction—translating to a total value range of 60% to 100%.
As we delve deeper into the company’s specifics, we can usually narrow the range to 10% to 20%.
For a 30% to 50% value range (with no knowledge of your business): If your company is valued at $5 million, our estimate might range between $2.5 million and $7.5 million. Yet, without insights into your business, pinpointing where it falls in this range isn’t feasible.
For a 10% to 20% value range (with knowledge of your business): If your company is worth $5 million, our estimate might span between $4 million and $6 million. In this scenario, armed with in-depth knowledge of your business, we can specify where your business likely stands within the range. We can highlight the specific factors impacting its value and precisely guide you on how to influence that value.
Ultimately, the utmost value we offer to owners transcends mere numbers—it’s the comprehension underlying those numbers. Why is your company worth what it is? What strategies can enhance its value?
At CasinosBroker, we follow a methodical process to determine the value of small to mid-sized companies:
1. Initial Assessment and Data Collection:
We begin by requesting essential financial statements. This typically comprises:
- Three to five years of profit & loss (P&L) statements
- Three to five years of balance sheets, which help us evaluate accounting accuracy
- Current accounts receivable and payable aging schedules
- List of monthly revenue for the past three to five years
2. Comprehensive Questionnaire: We provide the owner with a detailed questionnaire spanning five to ten pages. This questionnaire is meticulously crafted to uncover factors that could influence the company’s value. Once completed, we engage in a 30-45 minute discussion with the client to further explore these aspects.
3. Normalization of Financial Statements: We assist the owner in normalizing or adjusting their financial statements. After receiving a list of adjustments, we review and validate them for accuracy. This process often involves educating the owner on allowable adjustments.
4. Data Analysis: Upon receiving the financial statements, we input the numbers into our internal spreadsheet for thorough analysis. We diligently search for expense fluctuations, anomalies, and underlying stories behind the numbers. This detailed analysis, spanning several hours, helps us identify business trends that might impact value. We create a comparative P&L to analyze normalized figures year over year. This aids in understanding the company’s operations, unique advantages, and overall performance.
5. Industry Research: Our research extends to the industry, encompassing comparable transactions, industry benchmarks, and valuable sector-specific insights.
6. Financial Model Refinement: We finalize our financial model, ensuring accuracy and relevancy. Subsequently, we provide the comprehensive spreadsheet to the owner. This step involves in-depth discussions, typically lasting at least an hour, to cover elements such as multiples and factors influencing the company’s value.
In its entirety, this meticulous process requires a minimum of ten hours for thorough execution. With the process concluded, our objective is to empower the owner with a profound comprehension of the value-affecting factors pertinent to their company. They will gain clear insight into their position within the value range and the underlying reasons. This clarity assists them in making an informed choice—whether to finalize their decision to sell or to opt for strategic measures that enhance the company’s value before pursuing a future sale.
Taking a Structured Approach to Business Valuation
An estimation carrying a potential value range of 30% to 50% lacks the precision most sellers require for pivotal decisions like selling. Conversely, a valuation presenting a range of 10% to 20% provides owners with a sufficiently clear perspective to determine their subsequent steps.
This comprehensive analysis delves deep into understanding the client’s business. Employing a methodical approach is paramount to ensuring no detail goes unnoticed. The significance of even a small factor can ripple through the expert’s evaluation. Hence, we guide all potential clients through this meticulous process when appraising their businesses. Alongside tailored inquiries aligned with their industry, each client receives an identical list of 100 questions. While some may appear routine, they supply us with the essential data for an informed estimation. This comprehensive approach demands time, but it’s our way of guaranteeing accuracy. Drawing from our scrutiny of numerous transactions, we’ve developed a checklist and questionnaire that consistently capture the pivotal variables influencing a business’s potential value.
It’s important to note that we delay the request for tax returns until a later stage in the process. These returns serve to corroborate, to some extent, the accuracy of the financial statements employed in subsequent phases.
We meticulously analyze the adjusted/normalized financial statements to identify trends that wield a significant influence on value. Pay attention to the cells highlighted in red or green; these aid us in detecting trends that could potentially shape the company’s value.
We also assess monthly revenue trends to gain insights into the company’s growth potential and risk factors. Businesses with consistent growth hold higher value compared to those with fluctuating and uncertain revenue patterns.
Questions to Ask When Valuing a Business
Here are several questions we pose to thoroughly evaluate a company’s value:
- Is there a distinction between cash and accrual-based financials?
- Is accrual accounting being properly executed?
- Are owners receiving market-level, below, or above-market salaries?
- Are family members involved in the business? Are their salaries below, at, or above the market level?
- How many hours per week do owners dedicate to the business?
- What are the company’s growth prospects?
- What are the risk factors associated with the company?
- How does the company compare to its industry peers?
- What are the gross margins like in comparison to industry standards?
- Does the company possess valuable intellectual property?
- Is revenue steady, increasing, or decreasing?
- Are there concerns about customer concentration?
- Is there a presence of recurring revenue?
- Does the business rely on a substantial, repeat customer base?
- Can the business be easily relocated to another geographic area?
- Is the seller open to financing part of the purchase price?
- Is the real estate owned or leased? If owned, is rent paid at market rate?
- Have employees signed employment agreements or non-compete clauses?
- How robust is the management team, if one exists?
- How long has the business been operating?
- Is the likely buyer an individual, strategic buyer, or financial buyer?
- Is the seller aware of recent industry acquisitions?
- How accurate are the financial and accounting records?
- Is any equipment leased? If so, is it a capital or operating lease?
- How much working capital is needed to run the company?
- What’s the competitive landscape? Saturated, consolidated, fragmented, small businesses?
- How does technology impact the business and industry?
- What’s the customer attention/attrition rate?
- What’s the employee turnover rate?
- Has revenue displayed consistent growth recently?
- Is the business subject to seasonality, cyclicality, or counter-cyclical trends?
- Are gross profit margins steady, increasing, or decreasing?
- Is the seller willing to sign a non-compete? If yes, for how long?
- What entry barriers exist in the industry?
- What’s the annual investment in capital improvements? (Note: sophisticated buyers subtract an amount for working capital)
- How do average transaction values compare with industry peers?
- Does the business possess trade secrets?
- Are there customer contracts in place?
- Is the lease above or below market? Is the property for sale?
- Are there ongoing product developments that can boost business value?
- How do the business’s margins compare with industry standards?
- Are accounts receivable in good shape?
- How scalable is the business?
- Can marketing methods be automated or are they overly reliant on the owner’s personal efforts?
- Are key employees willing to remain?
- Does the business carry sufficient insurance coverage?
- What inventory accounting method is used? Has this significantly affected earnings?
- Is any inventory obsolete? If so, has it been written off?
- Can pricing be increased? Notably, price hikes directly impact the bottom line.
- Has the business adjusted trade credit to boost short-term revenue?
- Is there any ongoing litigation?
Your business holds significant value, making it worthwhile to invest in an experienced professional for an informed and meticulously researched opinion of its worth. At CasinosBroker, we go beyond offering a mere number. Our approach involves providing a range of values and expert guidance on your position within that range. We also furnish insights into enhancing your business’s value. Our aim is to engage in a knowledgeable conversation about the key factors influencing your company’s valuation.
Considering selling your business? Reach out to us today for an initial assessment of your company’s value and to schedule a complimentary consultation regarding how we can assist you.