Timing and value are both important
An old proverb comes to mind this time of year. “Make hay while the sun shines.” Take advantage of clear weather. Capitalize on opportunities. Avoid the rain
The same can be said for business. Take action while times are good. If a sale is in the near future, best not to wait for any clouds to gather. A key first step is a valuation, and there are several available.
Business valuations are typically based on three main methods:
- Market approach
- Income approach
- Asset approach
With a market approach, we place more weight on recent sales involving comparable entities. This tends to provide the best insight on how the market views deals at this time. We also keep a pulse on the market in general to understand trends and buyer sentiment. The result is a valuation more in line with market realities.
With the income approach, valuation professionals often use the discounted cash flow formula which includes estimated future growth trends. These forecasts are subjective. They depend on what the company sees over the horizon.
In an asset approach, the fundamentals of a business are valued. The focus is on hard assets such as the facility and the equipment. This can be very helpful if financing is the goal. But assets alone don’t necessarily translate into income for an acquisition.
Each approach has its place, depending on the purpose, the industry, and certain business characteristics. Give us a call and we can discuss what makes the most sense for your situation.
If you are considering a sale, as an M&A advisor, we encourage you to take advantage of what remains a seller’s market. In general, we are seeing strong values and eager buyers especially for highly profitable entities.