If you’re like the rest of us, you’ve probably employed multiple strategies to make your decision about selling, or buying.
It’s probably a combo of gathering data, seeking the opinions of trusted peers and your loved ones, and even using a little good ol’ gut instinct (aka intuition).
Now it’s time to turn your decision into reality. In order to do that you’ll need an accurate (and realistic) assessment of what your company is worth. This is where a trained professional will help you get the number that will solidify the truth on whether you can sell and retire (explore other ventures, pursuits, passions, etc.)…
…or whether you need to (or want to) stay and grow.
Calculating value is key to turning your decision into concrete action. If you’re like most people, you’d prefer (need) a trusted guide to figure this out. As you look for your expert guide, I want you to remember this (as well as my very serious expression when I say this):
“Be wary of business valuation analysts that aren’t specialized in the IT Services and Technology industry. They will misrepresent the true value of your firm about 98% of the time because they lack the understanding of industry attributes and idiosyncrasies that fundamentally drive value.”
Business value is directly driven by its industry. In other words, don’t ask someone who’s perpetually bankrupt for financial advice.
Valuation analysts are specialized in appraising and providing valuation services for their clients’ companies, as well as analyzing properties, risks, costs, and expenses using a variety of metrics. When selecting a business valuation firm to work with, make sure they have a certified valuation analyst on their team. If not, and I don’t say this lightly, run.
Not having a certified valuation analyst on staff is a huge (and costly) mistake for the people who hire them. In fact, this is why I founded iT Valuations. After decades spent working in IT Services and Technology firms, it became clear that many business owners and executives were hiring people that lacked a nuanced understanding of the IT industry. As you can imagine, the hired “experts” were applying the wrong methodologies, which inevitably led to inaccurate valuations causing undesirable (and unintended) consequences (aka money left on the table).
Basically, certified valuation analysts prevent founders and executives from going through this:
As you know, selling and buying companies is big money with even bigger stakes. (How many years of life will be defined and determined by how well this process goes?). Wouldn’t you want a trained expert to help you navigate potential pitfalls of unintended consequences?
That’s why I hire a realtor when I plan to sell or buy a house, a stock broker when I’m looking to invest, an organizational consultant when I need more work efficiency, a personal trainer while I contemplate an upcoming marathon and a barber when I don’t want to cause my family to scream in horror upon seeing my latest fashion decision. You probably hire experts daily to help you out too without giving it a second thought. So use the same sensibility when looking for the right valuation analyst to assess the value of your company.
Though your failed home haircuts won’t cost you much (and at least, it’ll grow back, usually). It’s virtually impossible to correct the financial fallout from an inaccurate calculation of your company’s value.
So, just to recap:
- You’ve made a decision. You’ve decided to sell or to stay and grow your business through acquisition.
- You need to figure out how much your company is worth to finalize the action plan.
- You aren’t a trained expert in valuating, selling and buying companies. You’re not a gambler so you need help.
- You‘re looking for a valuation analyst with in-depth knowledge and understanding of the IT Services and Technology to correctly assess your company’s financial value.
- You’re not a barber and will refrain from cutting your own hair at home (unless you’re Chewbacca and can regrow your mane overnight).
Now it’s time for me to address the elephant in the room since it’s the first thing every founder and executive asks:
Their (multi-)million-dollar question: “How much is my company worth?” (aka “just ballpark it for me, will you?”)
To which I reply with the most annoying answer: (No, because you’ll hate me later.) AND well, it depends…
This is why we lock down all throwable objects in our office.
Listen, I get your frustration (and I’m truly not trying to just give you a sales pitch here). I really do. You’re a highly skilled and successful founder and/or executive. You don’t have time for this “it depends” business. Seriously, who do I think I am? And haven’t I heard of something called competence? Again, I get it.
Because you’re absolutely right. There should be a calculator where you can just input your net profit figures in and multiply it by an industry standard and voila, you have the most accurate sales value ever, (which would be mind-blowingly phenomenal).
However, the truth is that this capability doesn’t exist yet (and even if it did, calculating business value still wouldn’t be that easy). Though unfortunate, getting a realistic determination of value is a more complex and time-consuming process than most people think. It requires a careful analysis of assets, a keen understanding of the business and industry (IT Services and Technology), and the application of the most appropriate methodology (from a plethora of available options). (aka You’re going to need a human that’s valuation analysis certified. )
In short, besides looking at the economy, the industry, comparable transactions, we have to look at the specifics of your company and how it compares to your peers in the market to determine the company specific risk. Fundamentally, there are 18 drivers of value that need to be examined to determine your company’s specific risk, like recurring revenue, operational maturity, market share, competitive advantage, leadership team, financial and legal fortitude (to name a few). This needs to be determined before we can even get to the multiples and calculation methods, and please don’t forget to figure out your required working capital.
Now that the complexity of assessing your company’s value is clear, I’d like to demystify the process of selling your business. Typically, this is the process a professional sales and growth firm will take you through and the questions they’ll answer:
- Mergers & Acquisitions (M&A) Readiness Review – How attractive is your business to buyers? Or how equipped are you for an M&A?
- Calculation of Value – What can be expected in terms of a valuation, or multiple for your company? What is the EBIDTA and how will it impact the valuation?
- Buyer Attraction – Who is the ideal buyer? How do we find them? How do we vet them? How do you meet them?
- Letter of Intent – How do we negotiate and frame up an acceptable offer? What is needed legally?
- Due Diligence – How do we get the buyer all business-related documents? Why does this matter?
- Definitive Agreements – How do we negotiate and re-negotiate all contractual terms until both parties are in agreement?
- Post-Merger Integration – How to ensure the acquisition is successful? What needs to happen before and after the close?
Remember every company is different, and so the selling and buying process may vary according to the unique needs of a business.
Lastly, let’s talk about how earnings before interest, taxes, depreciations, and amortizations (EBITDA) is often more distorting than helpful. EBITDA is a funny number. It is often misleading but at the same time it is a cornerstone to correctly calculating value. We go through a process of adjusting (normalizing) EBITDA to get it correct as few companies financials reflect EBITDA accurately.
EBITDA does for a company’s finances what social media does for life: paints a very rosy (albeit unreliable) picture and it is imperative to get the adjustments correct.
Essentially, EBITDA isn’t always a trustworthy determinant of a company’s cash flow, which, as you know, is basically, the air (or lack thereof) that companies live by (and die by).
To talk with us about how we can help you IT services business finally solve your struggles with growth and profitability, click here to contact us on our contact us page.