A word of caution when it comes to comparing business valuations: Many participants in private markets say obsession with multiples is unwise. "Value is in the eye of the beholder," says David Malizia, managing director at Florida Capital Partners, a Tampa-based private equity firm. Malizia believes that many valuation experts take an overly technical approach to their craft that's inappropriate for private businesses, the most illiquid of all the markets. Malizia compares selling a business to selling a house. "If you sold your house at $200 a square foot, and your neighbor wants to sell his house, he might want $200 to $205 a square foot. But the houses are not the same. It's not the same floor plan; it's not the same decoration; it's not the same landscape. Too many business owners think that if that business over there sold at that multiple, I should get the same multiple. But there are different management teams; there are different product lines; there are different profit margins; and there's a different emphasis on strategies and tactics."
"I'm a three- to five-times cash flow valuation man."
On the other hand, if you're looking to sell a business, you've got to watch out for people who tell you not to pay attention to multiples. "Sellers should recognize that buyers are obviously trying to come in and get it at the lowest possible valuation," says Steven Rogers, clinical professor of management and finance at Northwestern's Kellogg School of Management. Rogers recommends that sellers use the discounted cash flow model, which forecasts the amount of cash a company will be able to throw off in future years, then derives a present value from that prediction. Interestingly, Rogers likes the technique precisely because of the uncertainties involved in making future projections and the flexibility those uncertainties provide. Unlike Malizia, Rogers is a believer in multiples as eternal verities. "I'm a three- to five-times cash flow valuation man," he says. As he explains in his book, The Entrepreneur's Guide to Finance and Business, in a typical deal, in which a buyer finances 75% of the purchase with debt, he expects to be able to pay off that debt in five to seven years. That means he shouldn't be willing to pay more than five times cash flow for a business.
Another important part of the value equation is you, the owner. How long are you willing to stay on as a manager and a minority owner so you can transmit your unique feel for the business? Crader says an ideal seller is an owner in his mid-fifties who is willing to stay on as a manager with an equity stake for three to five years. But Jester tells those owners really interested in getting out not to worry, that he's got plenty of people ready to take over "if somebody says it's time to ride off into the sunset."
In any case, now is a good time to consider selling, and now is always a good time to value your business. The process means considering multiple variables and running multiple scenarios. Potential buyers may emphasize the more pessimistic assumptions and outcomes, but they may also be able to create grander strategic plans than you ever could imagine with resources and connections you didn't know existed. Good business brokers or independent appraisers should be able to do the same.
Sidebar: Maximizing a Company's Value
Last year, a venture capital firm eager to invest approached Bear Naked
Granola in Darien, Conn. Instead of jumping at the chance, the cereal makers stopped in their tracks. "I had no idea how much the company was worth," says founder Kelly Flatley. But she and co-CEO Brendan Synnott recognized that the stronger portrait they could paint, the more cash they might get.
Instead of paying a high fee to a business valuation expert or allowing outsiders to tell them their own story, Synnott and Flatley do their own valuations. What they've learned in the process has changed the way they do business. For example, the co-chiefs quickly realized they lacked accounting data, so they retained a CPA and bought new accounting software to track every dollar made in real time. In addition, Synnott says, the process compelled him to scrutinize cost of goods, a former weakness for the company.
When they looked at their books through the lens of the retail industry, they found that valuation multiples in retail had fallen below those in wholesale or gourmet brands. Those categories proved more fitting for a company that bakes at least 4,000 pounds of cereal a day and moves a majority of its product through groceries such as Stew Leonard's and Whole Foods. Their next challenge, in terms of showing the company's worth, is a happy one. "We've gotten into some big accounts based on our performance and solid relationships with smaller or initial customers," says Flatley. "Those aren't on our ledger yet. But they're definitely a part of our value." -Lora Kolodny
