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Maximize Your M&A Potential: iKadre's Guide to Realistic Business Valuations & More!

It’s the last month of 2023 and we’re excited to wrap up the year with more valuable insights, information, and industry news from the dynamic world of mergers and acquisitions. As a women-owned M&A firm, iKadre is dedicated to transforming businesses and championing diversity and inclusion within the industry. This month’s focus: a guide to realistic business valuations.

 

There are several aspects to making your business appealing to buyers. In our new series, Be Attractive to Buyers, we will take a topic each month and dive deeper into the reasons why the best exit strategies are foundational, and it’s never too early to start on yours. iKadre is here to guide you through the process and help you take action on your success story.


Business Attractiveness: Valuations

A realistic valuation is not just about setting an asking price; it's about understanding the health and potential of your business. Unlike the fluctuating public market valuations with readily available market data, private M&A demands a nuanced approach. It encompasses your company's unique story, its operational strengths, and potential growth trajectories. 


How To Determine Your Company’s Worth

  • Financial Statements: The balance sheet, income statement, and cash flow statement are crucial. Ensure these are in meticulous order.

  • Financial Analysis: Focus on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a key metric. 

  • Market Comparables: Look at recent private M&A deals in your industry to gauge value benchmarks.

  • Growth Potential: Clearly articulate your business’s growth prospects and unique value proposition. What are your value drivers? Is it your customer base, intellectual property, market position, or systems and processes? Current market conditions require more preparation from sellers, with a need for greater scrutiny from buyers. Sellers should anticipate a higher level of due diligence and be ready to justify value comprehensively. 

  • Risk Assessment: Identify and address potential risks that might impact your revenue, operations, brand image, liability, employee productivity, market volatility, regulatory changes, or any other aspect of your business that could influence potential buyers. 

  • Potential Synergies: Whether it’s cost savings, diversification, market expansion, or efficiency gains, complementary or compatible value drivers can significantly affect valuation.

  • Multiples: These are fundamental metrics used to assess a company's value and distill it down to a single number. When you're dealing with complex financial data and various valuation methods, multiples offer an efficient way to get a ballpark estimate of a company's worth without diving deep into intricate financial models. They also provide a quick way to assess whether or not a potential deal is worth pursuing. Multiples are like the secret sauce of business valuation: They're a way to measure how much investors or buyers are willing to pay for a company based on certain key financial metrics.


Understanding Multiples

One of the most common multiples used is the Enterprise Value-to-EBITDA (EV/EBITDA). It’s the powerhouse metric. Imagine this as the MVP of multiples in M&A. EV/EBITDA is like a finely-tuned instrument. It measures a company's operating performance by comparing its enterprise value (the total value of a business, including debt and cash) to its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). It’s your guide to assessing true value, factoring in its capital structure and profitability.

 

The Revenue Multiple involves valuing a company based on a multiple of its gross revenue or sales. It's particularly common in industries where companies might not be profitable yet, but are generating significant revenues.


The Discounted Cash Flow (DCF) multiple is a valuation method that calculates the present value of expected future cash flows. The multiples derived from this method are used to estimate the value of a business. For private companies, these multiples are especially influenced by the risk profile, growth potential, and the stability of cash flows.


This is a small example of the many multiples used. You can compare your business's multiple to similar companies in your industry. If your multiple is higher, it suggests that your business might be undervalued, and if it's lower, it might be overvalued compared to peers. PitchBook’s Q3 2023 Global M&A Report does a great job of showing multiple trends for B2B and B2C.




Market Trends

It's been an interesting year thanks to a long list of factors like changing interest rates, a slowdown in inflation, and political events. PwC predicted the different elements would come together for a more favorable M&A market in its Global M&A Industry Trends: 2023 Mid-Year Update report. Here are some key takeaways:


  • Businesses in specialized markets are attracting more interest due to their unique positioning.

  • Companies integrating innovative technologies are seeing higher valuations. 

  • Shift from megadeals toward mid-market M&A for strategic transformation. This sign is smaller, yet strategic transactions are more desirable.

  • Deeper value creation and strategic repositioning are acquisition priorities and are being achieved through portfolio optimization, digitization, and business model changes. Energy efficiency, green tax credits, and sustainable financing are important factors. 

  • AI’s disruptive impact is influencing both corporate and private equity firms’ strategies and they are in a race to acquire businesses that leverage these technologies. 

  • PE firms are adapting to the tightening credit market by focusing on portfolio optimization and diversifying their investment strategies. 

  • The increasing prevalence of carve-outs and divestitures offers more competition for sellers. Certain sectors like IT and materials & resources are witnessing specific trends, such as the increased involvement of strategic buyers in IT for cybersecurity capabilities and growth in materials & resources M&A activity.


EBITDA Calculators

Try it Yourself

Experiment with basic valuation techniques using these calculators and templates:


Building Your Toolkit

Consider these strategies to help prepare your business for a successful M&A process.

  • Most importantly, manage your debt effectively to improve your company’s appeal to potential buyers or investors.

  • Streamline operations and product portfolios to demonstrate efficiency and cost-effectiveness.


Be Open to Changes

It's not uncommon for businesses to adjust strategies or operations to improve their valuation. A key aspect of a realistic valuation is providing clear and well-documented financial information. This includes not only your earnings and revenue streams but also intangible assets like brand value and intellectual property. 


At iKadre, we recognize the significance and magnitude of this process and are dedicated to guiding businesses through it. Our expertise lies in assessing your business and advising on strategies to enhance its value. Whether it's streamlining operations, boosting your brand presence, or finding the perfect deal, we are here to ensure that your business is not just valued fairly but also primed for successful acquisition. Remember, a valuation is more than a number; it's a reflection of your business's health, potential, and appeal in the market.

 

Let iKadre be your partner in this critical journey.







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