What is Your Business Worth? Roadmap to Help Determine Value of a Privately Owned Business

By Alberto Sinesi, Director and Robert Murphy, Senior Managing Director

The sale of a business is an emotional, life-changing event and determining its true value is a crucial first step in any sale process. Also, business owners may have a preconceived idea of what their business is worth and their value expectations may vastly differ from those of prospective acquirers. So, business owners need to be prepared and know their next move if approached by a potential buyer or have a plan if they are contemplating exiting their business in the near future. The bottom line is that the notion of “value” is fluid in nature and demands an understanding of what the business is worth to a potential acquirer as opposed to what it is worth to the owner. Let’s proceed with the steps to determine value.

Three Generally Accepted Methodologies for Valuing a Company

When working with a trusted investment banking partner, the deal team will utilize a subset – or all – of the following valuation methodologies to determine company value, all having benefits and challenges:

1. Precedent Transactions Analysis – This method estimates the implied value of a business by analyzing recent acquisition multiples paid in comparable transactions.
   
   
2. Comparable Company (Comps) Analysis – This approach leverages valuation multiples of publicly traded companies to derive the valuation of a privately owned business in the same or similar sector.
   
   
3. Discounted Cash Flow (DCF) Analysis – This method values a business by forecasting its future underlying free cash flows and discounting them to their present value.

Factors Impacting Valuation and Key Considerations

While theoretical valuation methods, as presented above, set the basis for estimating the potential purchase price of a business, various other factors – external and internal – will impact the ultimate transaction value.

External factors encompass overall economic outlook, geopolitical circumstances, specific market/industry conditions, general M&A activity as well as the availability and terms of financing, among others.

Internal or company-related factors include attributes, such as revenue/profit size, stickiness of revenue, margin profile, growth history, depth of management, nature and dependency from customer and supplier base and competitive advantages. A synopsis outlining critical business aspects and associated buyer considerations is presented in the following table:

 Business-Specific Attributes Affecting Buyer Appetite and Valuation

Historical Evolution of EBITDA Valuation Multiples by Deal Size

Source: GF Data, M&A Report
Note: (*) Private company buyouts only across all industries. TEV stands for Total Enterprise Value.

Industry Sectors in Demand

The table below provides an illustrative list of sectors that have witnessed resilient M&A activity and healthy valuation multiples over the past few quarters. Sectors in favor include companies with strong end markets, tangible growth opportunities, visibility of earnings, ongoing consolidation strategy and attractive free cash flow and margin profile.

Premium Valuation for High-Performing Businesses

A strong financial profile is one aspect which will positively affect the value of a business. Specifically, the “quality premium” is the reward in valuation for above-average financial performance which in the analysis herein is defined as companies with revenue growth rates and EBITDA margins above 10 percent for the trailing 12-month period (or one above 12 percent and the other metric at least eight percent). In 2023, above-average performing companies received a 28 percent greater EBITDA multiple compared to those that did not meet these criteria.

Historical Quality Premium for Private Company Buyouts

Source: GF Data, M&A Report
Note: Private company buyouts only across all industries.

One Final Consideration – Selecting the Right Investment Banking Advisor

No matter what valuation approach is used, or attributes a company possesses, the main takeaway remains: a business is only worth as much as someone is willing to pay for it. A healthy pool of potential acquirers ensures competitive tension in a deal process – often driving up the valuation of the target company. An experienced investment banking advisor should define the appropriate type of process for the business, obtain a higher value and significantly increase the odds of closing a successful transaction than any business owner could accomplish on his or her own.

Contact Us

• Alberto Sinesi
  Director
  PKF Investment Banking
  asinesi@pkfib.com | 203.273.5024
• Robert Murphy
  Senior Managing Director
  PKF Investment Banking
  rmurphy@pkfib.com | 561.337.5324

About PKF Investment Banking

PKF O’Connor Davies Capital LLC (DBA PKF Investment Banking) is a subsidiary and investment banking affiliate of PKF O’Connor Davies Advisory LLC. Securities-related transactions are processed through an unaffiliated broker-dealer, Burch & Company, Inc.

Whether a business owner is ready to sell the company or seeking growth through acquisition, our investment banking team is committed and credentialed to help owners achieve their objectives. PKF Investment Banking provides guidance through every step of the process and brings the expertise to enhance certainty to close – while always staying focused on maximizing the value derived from the transaction.

With deep expertise in and a dedicated focus on advising privately held middle-market businesses, the PKF Investment Banking team has completed over 300 M&A and capital raise engagements in North America and abroad during their careers. Our key services include sell-side and buy-side M&A advisory, exit readiness and transaction planning. For more information, visit www.pkfib.com.

PKF Investment Banking provides this report for information purposes only and it does not constitute the provision of financial, legal or tax advice or accounting or professional consulting services of any kind.