Why the Price May Not Be Right

May 22, 2015

Picture this—you find yourself center stage on The Price is Right! one of the most popular game shows in television history. There you are on primetime TV selling your company. Now that you’re in the hot seat, could you accurately estimate your company’s value in today’s market? More importantly, would you be the winning contestant with the closest estimate to the actual price?

The truth is that most business owners struggle to correctly estimate the value of their companies. Searching for answers, they look to experts to determine its worth. The expert’s valuation is commonly based on financial performance, primarily the amount your company earns each year known as EBITDA (earnings before interest, taxes and depreciation).

As a business owner, not knowing your company’s worth could place you at a disadvantage and potentially leave you empty handed when the time comes to sell your company. There are industry consultants who charge a handsome fee to provide owners valuations. The majority of these valuations are driven by financial performance and limited market information; however, there are several reasons why the price they provide may not be right.

  • Earnings do not always reflect full value – Earnings will always be a prime factor in determining company values. However, other factors can impact values such as:
    • The value of patents or market share – Even if your company is not large, the value can increase dramatically if you own patents that protect your products or you control market share. These values will not be reflected in your EBITDA, but it will definitely impact company value.
  • Dramatic changes in the market – If the demand for the product or services your company delivers suddenly declines or increases, it will impact your company’s value. This value factor can change dramatically, even within a short period of time based upon market changes, new competitors, etc.
  • Lack of effective marketing – When selling your company, effective marketing is key to securing a premium price. The value of your company can be negatively impacted due to:
    • Failure to market your company internationally – Your company may be worth substantially more to an international investor seeking to break into the U.S. market or acquire a technology advantage. To ensure the price is right – market internationally.
  • Lack of research capabilities – there are thousands of potential buyers for your company. Identifying the ideal buyer is determined by your research capabilities. Your investment banker should have access to multiple databases and a long, established list of both potential domestic and international acquirers.
  • The market determines value – Your company is worth whatever a potential buyer is willing to pay. If you effectively market your company domestically and internationally, you will create an auction-type environment between the best potential buyers that helps to ensure you get the best price possible. When buyers compete against each other in a silent auction, they realize that others are seriously interested in your company and the price will be influenced by their desire to prevent a competitor of theirs from buying your company.

The value of your company is driven by much more than numbers on a spread sheet.  If you are seriously considering selling your company – ensure the price is right before you close the deal.

About the Author

John Sloan | Vice Chairman

John Sloan is the Vice Chairman of Allegiance Capital, a middle-market investment bank that works with business owners to help them sell or raise capital. 

John has more than three decades of C-level experience in investment banking and private equity.  He has personally executed transactions with fleet owners and understands the unique needs of the trucking industry. 

During his career, John has raised more than $1 billion in debt and equity.  He is an expert in all aspects of investment banking and has evaluated and negotiated the acquisition of more than 30 companies in: energy, construction, retail, telecom, environmental, logistics and manufacturing, with an aggregate value in excess of $7 billion.

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