A Question of Values: Putting a Number on the Worth of Your Business

By Paul Reilly and Peter J. Schaefer

Sooner or later, it crosses the mind of every entrepreneur: “What’s my business really worth?” The real value is a mix of assets, revenue and potential, plus a measure of goodwill that puts a number on carefully cultivated relationships. So how do you get there?

Finding EBITDA
Whether a company is sold as a going concern or as a tuck-in, valuation will usually be based on a multiple of EBITDA (earnings before interest, tax, depreciation, and amortization) or on net value of assets.

Generally speaking, a multiple of EBITDA will be the method for profitable businesses with net value of assets being the alternative for businesses that are not as profitable or that are rich in assets. Buyers like both methods to be comparable because if one is greater than the other the difference could raise questions about the viability of the deal. If net value of assets exceeds the value established by the multiple of EBITDA, the buyer may wonder whether the business will generate enough future profit to justify the purchase price. If multiple is ahead of net value of assets, accounting rules about goodwill (the difference between the purchase price and the fair market value of the net assets) may force a future write-down known as “impairment.”

All Else (not) Being Equal
Buyers typically want valuation to be driven by profitability, not asset value. New Direction Partners recommends that buyers set a walk-away price by keeping at least a one-point spread in their favor between their EBITDA multiples and those of the companies they have targeted for acquisition.

Sale of Assets
By comparison, net value of assets is an valuation method commonly used for tuck-ins and is based on an appraisal of everything that represents value, primarily accounts receivable, inventory, plant, and equipment. Next comes determination of goodwill—the portion of the selling price over and above the value of the assets.

Even if you are not in a valuation frame of mind at the moment, it may be useful to begin thinking about the valuation method you would use. In today’s industry, every printing company is a potential candidate for the buyer’s or the seller’s role in an M&A transaction. pP

Paul Reilly and Peter Schaefer are partners in New Direction Partners (NDP), the leading provider of advisory services for printing and packaging firms seeking growth and opportunity through mergers and acquisitions. For information, e-mail info@newdirectionpartners.com

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Paul Reilly Author's page Paul Reilly, partner at New Direction Partners, has been in the industry for over 30 years and for the last eight years has been providing investment banking and financial advisory services for privately held and family-owned businesses. He brings supplier experience as a senior executive at Polychrome, now part of Kodak, a worldwide supplier of printing and packaging supplies. He also brings extensive acquisition experience as CEO of Cenveo, one of the industry most active acquirers.

Peter J. Schaefer Author's page