You’re thinking of selling your company. Before you do anything, you must start with two things to find out your company’s worth: determining why you need business valuation and assembling all the required information. As the years go on, Americans have lost faith in their banks, dropping from 60% in 1980 to 21% in 2014. For this reason, it may still be a good idea to do your own research and calculations using a business valuation tool. Consider the following ways in which an investor might look at the value of your company to help you make the decision to sell.
Multiple of EBITDA
Investors tend to think of the value of your company in terms of multiples of EBITDA (earnings before interest, taxes, depreciation and amortization). Any business valuation company will explain that this business valuation tool is used in order to estimate what future profits may be and how much your company will be worth.
As you might be looking at your company’s growth in the moment, investors and business valuation services are looking at your company’s growth over time and may consider how much it can make if it weren’t growing at a steady rate. Many times, investors like to consider revenue growth in terms of growth within the next five years.
Your company’s EBITDA margin is determined by dividing your EBITDA by your revenue using business valuation tools. For this reason, increasing your business’ EBITDA by either increasing revenue or increasing your EBITDA margin makes it more valuable to an investor.
In many cases, although an investor may have the funds to purchase your company, they are still more likely to take out a loan to purchase it. This is because the business valuation firm they may be using has advised that they are able to service the new debt they incur by taking on a loan. As a result, it is less of a risk for them to borrow instead of risking their own funds.
Before anything is signed and agreements are made, it must be determined exactly how much the investor will be buying of your company. If the investor buys all of your company, you may have a chance to buy 20% of it back, but on the same terms as the investor. Consider this fact first before beginning any further negotiations.
Now that you have an idea of the business valuation tools and the numbers investors are looking at to calculate the value of your company, you are in a better position to decide whether or not to sell. Think of the company’s future in the next five years and consider it as a multiple of EBITDA, its revenue growth, its EBITDA margin, and how much ownership you want investors to have. Once you have these figures, determine if a buyout is still the right decision for your business.