Million Dollar Dinner: How to equate a businesses value

**rogercbryan** · 08-05-2008 07:55 AM

Million Dollar Dinner: How to equate a businesses value

I’m in the middle of my first multi-million dollar sale of a clients business. By pure change I ended up being a consultant for the seller and the buyer. I have absolutely no experience in deals this size yet I’m excited to be the one writing the actual sales proposal.

Last night at dinner I met with representatives from both companies as well as a commercial real-estate investor to discuss valuations. Now I’ve seen a lot of posts on YE about how to calculate the value of a business yet I haven’t heard anyone talk about first hand experience with this. Here is what I learned last night.

The ‘buyer’ is a $5B publicly traded company. The ‘seller’ has annual sales of about $14M with EBIT of about $2M and is privately held. The ‘seller’ has property that has been appraised at about $5M. The conversation yesterday was mostly about the ‘buyers’ desire to first- purchase the property (with or without the current business) and second- what price they would have to pay to get the business with the property. The formula I’m going to use is solely based on the value of the business.

The brokers for the ‘buyer’ gave this as their formula.

1x’s annual sales in ratio to 4-7x’s annual EBIT.

$14M x 1 = $14M
$2M x (4 to 7) = $8 to $14M

The goal is for the range to have matching numbers as the above formula does at $14M. What I noticed about the second half of the ratio was that the expected profit margin needs to be at about 15% to get a bottom range value. The brokers for the ‘buyer’ stated that they are looking for 20% or higher when doing a deal. This would mean that they would prefer that the ‘seller’ had EBIT of $2.8M. Because they are short of this the price of the business will be less then the top part of the range.

People have often asked me how they are supposed to determine where at in their valuation range is the correct price to sell their company. The thing I learned is that it is dependent on the acceptable profit margin for your industry. This means that if you do not know the accepted profit margin for your industry then you can not correctly evaluate your business.

Because the ‘seller’ is about 28% short of the desired EBIT then there has to be consideration for a 28% discount from the top end of the range. So ($14M * .28) = $392K or a sale price of about $10M. This was the first time I saw how an actual price was calculated. I’ve often told people that once you have your range you have to try to valuate tangible and intangible assets that are often hard to put a price on. This may not have been the best advice.

Now with this formula if the top end discounted price is less then the bottom of the range meaning that the margins are to thin for the industry then the ‘buyer’ would not even consider the deal. This usually is a show for operational and financial short falls.

I feel like I learned more during this four hour dinner then I had in the past three years of being out in the industry. I’m going to post more about this dinner later today.

**sauer13** · 08-05-2008 09:55 AM

Great post! I love learning new math based ways of analyzing business problems.

Is this a standard way of evaluating the value of businesses or is this specific to this deal or industry? If it is a standard way of evaluating values it could be expressed as the formula:

4*EBIT<Business Value<(7*EBIT^2)/(Industry Margin*Annual Sales)

I bet that is going to be a very handsome commission at closing.

Danny

**Gaulkin** · 08-05-2008 12:15 PM

If you have companies like this coming to you i dont understand why your trying to do little startups. If i was you i would go full time with this and make alot more money.

**rogercbryan** · 08-05-2008 02:27 PM

Originally Posted by Gaulkin

If you have companies like this coming to you i dont understand why your trying to do little startups. If i was you i would go full time with this and make alot more money.

I'm already full time with this. This particular deal is the first time I'm getting this type of opportunity. I've spent eight years in my industry trying to network with the top people and establishing a rep for myself. I still see a lot of potential in Internet businesses so I'm putting energy into learning those and building my experience/rep online. The current project I'm working on (gogets.com) actually has a great deal of benefits to my current company and will offer services to my current customer base. So I guess they are one in the same.

You can never do to much (if you succeed) but doing to little almost always leads to failure.

**Gaulkin** · 08-05-2008 02:39 PM

Originally Posted by rogercbryan

I'm already full time with this. This particular deal is the first time I'm getting this type of opportunity. I've spent eight years in my industry trying to network with the top people and establishing a rep for myself. I still see a lot of potential in Internet businesses so I'm putting energy into learning those and building my experience/rep online. The current project I'm working on (gogets.com) actually has a great deal of benefits to my current company and will offer services to my current customer base. So I guess they are one in the same.

You can never do to much (if you succeed) but doing to little almost always leads to failure.

You can always do to much and most people do, doing that will just burn you out and hinder your success in a particular venture.

Whats your fee for this consultation?

**andrewrichardgale** · 08-05-2008 03:40 PM

congratulations, im jelouse

**rogercbryan** · 08-06-2008 10:52 AM

Originally Posted by Gaulkin

You can always do to much and most people do, doing that will just burn you out and hinder your success in a particular venture.

Whats your fee for this consultation?

You would need to understand exactly what my company does in order to know why I do what I do. In its simplest form we process information in the sale of vehicles. That probably makes no sense. All the things that I'm working on are tied together in one way or another.

I do get burnt out sometimes... then I scrap a project here and there and move on. One of my clients told me that you always need 10 things 'in the fire'. If two of them work out then you're well on your way to real money.

About my fee:
As a consultant working both sides of the fence I'm not working for a fee. If this deal goes through my company will process an extra 15,000 vehicles a year at about $25 per vehicle... so my motivation is the $375,000 in fees I'll collect in 2009.