Arriving at an M&A valuation
What is your company worth? The balance sheet of assets probably doesn't tell the entire story when you consider the potential for your company to generate serious revenue as it grows and thrives. The value of your startup might be even higher when you consider how it can be leveraged in conjunction with the resources and reach of a larger buying company. For that reason, determining what price or payment arrangement is "fair" can be tricky for entrepreneurs to determine.
"The company's assets less its liabilities produce the company's net worth. Very few companies, however, are willing to sell for net worth. It represents a static value, a snapshot in time. A company is a dynamic entity expected to produce earnings in the future," explains Inc. Magazine.
To arrive at a mergers and acquisitions valuation, a business needs the foresight and confidence to assert its potential before a buyer. This is easier said than done, and requires a great deal of evidence that your humble enterprise is on track to dominate its marketplace. The more established a business is in its industry segment, the more expensive it is to buy. That's why acquiring companies often look for lesser-known gems with great potential and the right price.
Several methods exist for determining the value of a company. According to Inc., one of the most popular is the price-earnings ratio.
"A $100 share earning $10 per share a year, is said to have a 10:1 ratio," explains the magazine. "The market, in other words, is willing to pay $10 for every $1 of earnings. A company with an annual after-tax earnings of $500,000 and a P/E Ratio of 7 would thus be valued at $3.5 million."
Another source of valuation information is the enterprise value-to-sales ratio. This takes into account stock, cash and cash-equivalent assets and outstanding debts. That net total is divided by the company's revenue, gauging how lucrative an enterprise is based on real sales. The lower this ratio, the more valuable a company probably is. A negative value suggests that there may be enough cash on hand to finance some of the deal.
Startup entrepreneurs, whatever their finance savvy, might not be thoroughly versed in the moving parts of a company valuation for the purposes of a merger or acquisition. Working with an experienced M&A advisor can give your company the support it needs as it pursues, negotiates and closes an M&A deal. Contact us today to learn more about how our services can help your business meet its growth objectives by partnering with the right buyer.