Tips on Business Valuation for M&A (Merger & Acquisitions) Transactions
Many business people do not understand key factors in business valuation for M&A or merger and acquisition purposes. It is different than preparing a valuation for other purposes. If you are getting your business valued with a business sale in mind the key factors are:
Your sales value (PRICE) is based on:
- 12 months rolling financial results
- 3 years results for financing, i.e. the past can only hurt
- EBITDA or Discretionary Earnings
- Goodwill is an accounting calculation not a function of years in business
- No buyer cares what your accountant’s, your, (or mine) valuation is.
- Buyers care about what it is worth to them and what they will have to pay.
In many ways the last bullet point is the most important one. Business Valuation for M&A Transactions is about estimating the results of a sales process. Sales processes may start with fact but they quickly become filled with emotion, negotiation, deal heat and all the rest. This is just not the same as calculating the value for a rational (we hope) judge or IRS engineer.
Our best advice to you is to have a business valuation prepared by a valuation analyst that understands both the valuation and the M&A worlds. No one can precisely predict the future or the end result of a sales process but the estimated value and report will be far more useful to you as a participant in the process.