On Valuation: Rules of Thumb
By Jack Mixner 714 449 1040 www.mixnerstrategy.com
When it is getting closer to time to sell a business, all sorts of ways to value a business start to go through the CEO's mind. Since she or he has been at it a while, three or four ways always stick out. Which way to go?
Recognize that there are formulas for valuing a business. A few are:
- Multiple of revenues
- Multiple of earnings (net income, owners dicretionary cash flow, EBITA, etc.)
- Multiple book value
- Multiple of a measured unit (restaurant tables, hospital beds, subscribers, etc.) (after Weitzke).
Then we always bring a professional into the mix, especially if there are legal questions related to a valuation. The list above generally becomes the basis for discussions and calculations. They're just a rough starting point, however.
I used to have a book entitled 85 Ways to Value a Business. Weitzke references another with three hundred. Use them to start, do the valuation the traditional way based upon analysis, applaud if they are similar to the Rules of Thumb result, and explain why the results are different if necessary. It is completely sensible to include the flaws in the Rule of Thumb when they are found.
Strategic Implication
Want a higher valuation? Have a professional help calculate it. It may cost more, but in the long run the company will probably be sold for a higher price and more quickly to boot.
We use valuations as part of the strategic planning process. An independent valuation may be the first step. Then, we will decide which recommendations for increasing value make the most sense for us to follow, create strategies or tactics around them, and begin implementation. Finally, we may actually perform a second , independent valutation to make sure things worked out the way we had predicted.
References
Wietzke, Robert. Rules of Thumb. http://www.valuationpro.com/Article,Rule.asp