How To Value a Business for Sale (Mergers and Acquisitions)

Summary

Brent Cenkus, a business attorney and M&A advisor, discusses business valuation strategies, focusing on the Main Street market segment under $2 million. He explains that while larger businesses may use methods like discounted cash flow, for smaller businesses, comparable transaction analysis is crucial. Cenkus emphasizes the importance of Seller Discretionary Earnings (SDE) as the key metric for valuation in this market, adjusting for owner-specific expenses. He also touches on the impact of growth, customer concentration, and other business factors on the final valuation.

Takeaways

• 📈 Brent Cenkus discusses business valuation, focusing on Main Street and lower middle markets, typically under $25 million.
• 💼 He differentiates his dual role as a business attorney and M&A advisor, dealing with both legal aspects and business brokerage.
• 🔍 For larger businesses, methods like discounted cash flow and comparable company analysis are used, but not applicable for the market segment discussed.
• 🏦 The primary method for valuing businesses in the $1 million to $20 million range is comparable transaction analysis, focusing on recent sales of similar companies.
• 💹 Seller Discretionary Earnings (SDE) is the key metric for valuation in this market segment, which adjusts earnings by adding back owner's salary and discretionary expenses.
• 📊 EBITDA is a common metric for larger deals but is not used for businesses under $25 million; SDE is preferred for its relevance to smaller businesses.
• 🏠 Geographic location and industry are crucial factors in finding comparable transactions for valuation purposes.
• 📊 Multiples vary by industry and company size, with larger companies typically commanding higher multiples due to less risk and more stability.
• 🏢 The business valuation process also considers intangible assets and liabilities, adjusting the valuation based on what's included in the deal.
• 💡 Valuation is as much art as science, with factors like growth potential, customer concentration, and the business's reliance on the owner affecting the final price.
• ☎️ Brent offers his expertise as a resource for those looking to buy or sell a business, emphasizing the importance of professional advice in the valuation process.

Q & A

What are the two roles that Brent Cenkus plays in the business world?

Brent Cenkus plays two roles: a business attorney and an M&A advisor or business broker.

What is the primary focus of the video in terms of business valuation?

The video primarily focuses on how to value a business, which is crucial for both sellers and buyers.

Why is the method of business valuation discussed in the video relevant to the Main Street market?

The method of business valuation discussed is relevant to the Main Street market because it caters to businesses under 2 million dollars and the lower middle market up to about 25 million dollars.

What is discounted cash flow and why is it not commonly used in the Main Street market?

Discounted cash flow is a complex mathematical method that measures the cash a business will generate, adjusted for the time value of money and risk. It is not commonly used in the Main Street market because it is more suitable for larger businesses.

What is the dominant method of valuing a company in the 1 to 20 million dollar market?

In the 1 to 20 million dollar market, the dominant method of valuing a company is comparable transaction analysis.

What is the difference between EBITDA and Seller Discretionary Earnings (SDE)?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, which is a measure of free cash flow. Seller Discretionary Earnings, on the other hand, is used for smaller businesses and includes adding back the owner's salary and other discretionary expenses.

Why is the owner's salary added back in when calculating SDE for businesses in the lower end of the market?

The owner's salary is added back in when calculating SDE for businesses in the lower end of the market because buyers in this range are often buying themselves a job and will structure the compensation differently.

How does the size of a business affect the valuation multiples?

As the size of a business increases, the valuation multiples tend to increase as well. This is because larger businesses have more capital available for purchase and are often less risky due to factors like customer concentration and operational stability.

What additional factors are considered when valuing a business beyond SDE?

Beyond SDE, intangible assets and liabilities assumed by the buyer are considered. Intangible assets like real estate or significant equipment are valued separately and added back in, while liabilities are subtracted from the total valuation.

Why are asset deals more common in the Main Street market compared to liability deals?

Asset deals are more common in the Main Street market because buyers in this range often do not want to take on the liabilities of the business. They prefer to purchase the assets and structure the business as they see fit.

How does the concept of 'what someone is willing to pay' influence the final valuation of a business?

The concept of 'what someone is willing to pay' is a critical factor in business valuation as it reflects the subjective nature of the market and the unique circumstances of each buyer, which can lead to variations in the final sale price.