The variables that influence valuations may seem a bit foggy if you have never bought or sold a business. An article in Divestopedia from Kevin Ramsier entitled, “A Closer Look At What Drives and Influences Business Valuations”, takes a closer look at this topic.
M&A advisors play a key role in helping business owners understand business valuations. The final assessed value is based on a wide range of variables. Clarity is possible with some effort.
In Ramsier’s article, he points out, “value means different things to different buyers”. The “perceived value depends on the circumstances, interpretation and the role that is played in a transition.” It is important to remember that no two businesses are alike. For this reason, what goes into a given valuation will vary.
EBITDA stands for – earnings before interest, taxes, depreciation and amortization. Ramier points to several metrics, including return on assets, return on equity and return on investment. For companies with positive cash flow, multiples of EBITDA is another important variable. EBITDA is used in determining value. If a company has a negative cash flow, then the liquidation value of the business will play a large role in determining its value.
Primary Drivers To Consider
Ramsier provides a guideline of Primary Drivers of Valuation, Secondary Drivers of Valuation and Other Potential Drivers of Valuation. There are a total of 25 different variables listed. This accentuates the complexity of accurately determining valuation.
Ramsier includes the size of revenue and revenue stability to historical and projected EBITDA in the Primary Drivers of Valuation list. Also included in this list is potential growth and margin percentages. Other variables to consider are the local talent pool and people training.
Business Owner Support
Determining valuation is not a one-dimensional affair. It is a dynamic and complex process. EBIT Associates can help business owners determine the value of their business. We are experts in determining valuation. Owners who work with EBIT will know what to expect when the time comes to sell their business.