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How Much Is My Business Worth?

By Generational Equity

08/21/2017

“So just how much is my business worth?” is a question we get regularly when we meet privately with business owners at our exit planning conferences. Our answer is always the same: We have no idea until we do a thorough business evaluation on your company.

Although this answer does not please many who ask us the question, the reality is the steps we take to determine a company’s business enterprise value are very detailed and complex, and until our analysis is complete (which usually takes 60-90 days if a client’s financials are in order), we cannot possibly “ballpark” a company’s value.

But the real answer to the question of “how much is my business worth” is actually pretty straightforward:

The value of any business is what a willing and informed buyer will pay for it!

Ultimately, the market will determine your company’s value. Even after our analysis is complete, we often tell clients that are hoping for a higher number: Look, let’s take the business to market and see what buyers will tell us about its value.

You may be asking: Why would there ever be a variation between what your stated opinion of its value is and what buyers may pay for my business?

And the answer is simple: Your company has intangible, off-balance sheet assets that have value but the “value” of them will vary from buyer to buyer.

For example, Buyer A might be more interested in your blue chip client base, but Buyer B might be more attracted to your brand and reputation in the industry. Buyer C might be drawn to your tenured base of experienced employees and Buyer D might be more interested in your equipment and processes.

So, you see, your intangible assets, which by their very definition are nearly impossible to value numerically, could play a huge role in what buyers will pay for your company. And until you go to market, you really won’t know what your business is truly worth. Here is a partial list of some intangibles that can drive value:

  • Patents, Trademarks, or Copyrights – Depending on the industry you are in, these items can have tremendous value to certain synergistic buyers. The key is finding the right buyer who will pay a premium for the patents or trademarks that set your company apart.
  • Key Customers – This is especially true of those with whom you have long-term contracts. Often you see the value of your customers when you finally get paid for an invoice. However, the true value to specific buyers could go well beyond what you generate every month from these key customers. Often a buyer will pay a significant premium over a financial value simply to gain access to a solid, stable customer base.
  • Employees – Let’s face it, in many service-based industries your employees are the face of your company. If you have employees with long tenure, recognized experience, and solid credentials, some buyers will be willing to pay a premium for your organization in order to gain access to this talent.
  • Processes & Procedures – If you have been successfully manufacturing a product or providing a service for several years, chances are good that you have developed specific time-saving and cost-saving procedures and/or processes. These can be extremely valuable to key buyers.
  • Unique Products and/or Services – You are so close to your business, running it daily, you may overlook how unique your service or product is. In the hands of a larger player, with capital to advertise and market this fact, your company could grow dramatically. Key buyers who recognize this will pay more for this off-balance sheet asset.
  • Location, Location, Location – This old saying isn’t applicable only to retailers. You may be located in a part of the country that another industry player may want to enter. In a case like this, having an established organization where you are will be very attractive to many buyers located far from your business.
  • Equipment – This may have intangible value to certain buyers. Chances are good that if you are in a capital-intensive industry, the value of your equipment has been fully depreciated. However, if you are like most middle-market manufacturing entities, you have probably customized your equipment to make it function better and/or produce more. If so, to certain buyers, having access to this customized equipment could be very valuable.
  • Proprietary Lists — Proprietary lists can include customer or client lists, patent lists or even mailing lists, whether they are made up of customers or prospects. Lists can be especially valuable to a business if the relationships they represent are ongoing. Consider, for example, a magazine’s list of advertisers. The magazine may get 75% of its advertising revenue from the companies on that list. Therefore, the list is critical to the magazine's future profitability.
  • Beneficial Contracts — Long-term contracts can add value to a company. For instance, a company may have a contract that allows it to sell its product or service for a higher-than-normal markup. Or it may have a contract that allows it to purchase or lease items at a below-market rate.
  • Patents & Applications for Patents — How much the patents are worth depends on the strength of the patent claim (which can be difficult to determine if the patent hasn’t withstood litigation) and the patent’s economic and legal life.
  • Copyrights — Copyrights are trickier to value than patents because, while they may have a long legal life, their practical value may only last for a short period. This is especially true for technical works that become dated quickly. The value of a copyright also depends on the author’s previous success.
  • Trademarks and Brand Names — If a brand name or trademark lets a company sell its products for a higher price or in greater quantity than its competition, it has value.
  • Subscriptions and Service Contracts — Subscriptions are especially important for newspapers, magazines, and cable companies because a large portion of their revenues is based on subscriptions. With both subscriptions and service contracts, the longer they have been in effect, the more they are worth.
  • Franchise Agreements — Franchises with long track records and well-recognized names have significant value over newer, less known franchises. This is especially true in some industries (such as the hotel industry) that are dominated by franchises.
  • Software — Many companies have developed proprietary software specific to their businesses. If this software provides efficiencies and benefits that the business wouldn’t have without the software, it is a separate asset.
  • Goodwill — Goodwill means many things to many people, but generally it refers to intangibles like reputation, brand name, and location that lead to repeat business.

Keep in mind that this is just a partial list of off-balance-sheet assets that can add value to your business. And again, the “value” of these will vary from buyer to buyer.

Here is the key: You have to get your opportunity in front of as many buyers as you can so that your intangibles are marketed correctly. And, you need the help of an experienced M&A firm to “package” and present your business in a way that will help buyers clearly see what you want them to see in your company.

And this is really why Generational Equity has been one of the leading middle-market M&A firms in North America for years and years. Our team of deal makers is comprised of very experienced people, who have the proven ability to attract the optimal buyers to our clients. This is an art and a science but requires ultimately the ability to understand what buyers really value.

If the concept of off-balance-sheet assets and intangibles that add value to your business are intriguing to you, then you really need to consider attending a Generational Equity exit planning conference soon. We have designed these to be highly educational for business owners and enable them to learn a significant amount of information about, not only intangible assets, but also all the key steps involved in closing an optimal deal with an optimal buyer. Here is what a few of our clients have to say about the benefits of attending one of our conferences:

So, if you have no exit plans in place and have no idea where to begin formulating them, attending a Generational Equity exit planning conference is a must. To learn more, follow these links:

And don’t forget the answer to this question:

How much is my business worth? Plenty to the right buyer!

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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