Valuing a Business
From the Archives: This was written by my father back in 2016(!) when I was a Partner with Murphy Business Atlantic.
If you had stocks or mutual funds, you would likely receive a statement of your portfolio’s value once a month. If you are really loaded, once a week, and if you are stinkin’ rich (cash, not spiritually), well, your broker would be calling you every day, as well as his competitors, friends, mother, and everyone else on the planet!
But a business? Well, nobody calls (actually, we will call, and technically this is a solicitation!). There are lots of anagrams related to valuations like SDE, EBITDA, DCFM, SDCF, and terms like Operating Income, Future Cash Flows, Sustaining Capital, Normalizations, and on and on. And, in the words of the Donald, only I know what they mean!
You will hear people say 2-3 times earnings, 5 times earnings, or other multiples, but 2-3 or 5 or 10 times what? And how is my small contracting company different from his restaurant, franchise, retail outlet, or any other type of business?
And how do assets like the property, building, or equipment fit in? What if the building is worth more than the business? What if the equipment was built in the 1970’s and needs to be replaced? Should I buy the replacement equipment, lease it, or hold out hope that the stuff it makes is gonna come back? Does the franchisor require renovations every ten years? Is it coming up soon? You charge yourself rent in your own building, but how does that effect the value? What about the $500,000 in cash and investments that the company has saved up over the years? How does that effect value?
Ah! And what about the debt, the leases, the cash sales you’re not reporting, the kids’ phones, the girlfriend/boyfriend related expenses (we’re not judgmental). How do all these things fit together?
What about Taxes, Capital Gains Exemptions, or Family Trusts?
Why would I want to know how much its worth anyway! Maybe I have to refinance, or get rid of my pain in the butt partner who doesn’t like me bringing the dog to work (this might be the most important reason!). Getting a divorce? Getting married? Tired of the daily grind! Gotta split it between eight kids? Gotta sell it? Want to sell it! Or most importantly, just want to plan an orderly retirement!
Better to find out now than later! Call us!
Disclaimer: I am (thankfully) not a lawyer, nor am I an accountant. If any of this sounds like legal/financial advice, it's not. Take everything I say with a grain of salt. But not too much - I hear it's bad for your blood pressure.
