What's this company really worth?

© Kelpfish | Dreamstime.comQ: What is the best method for placing a value on my business for retirement purposes?

A: At some point every owner, for a variety of reasons, thinks about valuation and selling the company. There are many variables that should be considered when valuing a company, and since no two companies are the same, what follows is a basic guide.

Your company’s valuation will be based on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Each owner also will need to allow for add-back expenses, which are those expenses (and perks) that will no longer exist or may not occur for a long period of time after a sale. These expenses include major software or hardware installation, renovation to your facility, expensive vehicles not generally suited for business and compensation above industry and market norms. The higher the risk a buyer perceives, the lower the multiple. Conversely, the higher the reward, the higher the multiple. If a company has an EBITDA of $100,000 and a multiple of three, the business is worth $300,000.

There are several factors that make companies more valuable, and therefore they are rewarded with higher multiples. A company portfolio composed primarily of maintenance contracts is more valuable than a design/build or construction company because maintenance contracts generate a recurring revenue stream. A company with a history of a high percentage of up-sells (extras) to the base maintenance contract will receive a higher multiple. In addition, commercial accounts are generally deemed more valuable than residential, as they produce greater revenues and are viewed as more stable. Companies with narrow route density (accounts that are in close proximity to one another) are more favorable than those that are spread out over a large geographic area.

You also want diversification in the markets you serve. Having too many eggs in one basket increases a buyer’s risk. The term of the contracts (multi-year is more favorable than one-year renewable), account longevity (time you’ve held the accounts) and your retention rate (percentage of accounts you keep year over year) all have an effect on your valuation. People also play a key role, especially at your management, sales and foreman level. In addition to your team’s educational background, experience, skill sets and certifications and the average tenure of employees are important.

Good equipment is rewarded and is assessed by quality, condition, age and usage. Your facility’s physical condition and its location will affect the valuation. Facilities that are in good condition, have easy access to highways and are in close proximity to the customer base are favored. Furthermore, companies located in Sun Belt areas with year-round maintenance schedules receive higher multiples. Your processes and systems, including financial, sales, marketing, supply chain management, human resources, shop, training and field also are important in determining your value.

And don’t lose sight of your financial health. Companies that have consistent revenue and profit growth (in good and bad times) and that are considered best-in-class will be rewarded with higher multiples. Market dynamics, including the overall growth of a particular area and how saturated the competitive landscape is, affect overall valuation. Having a niche product, service or some type of exclusivity will increase your value. And, last but not least, your brand equity, your level of recognition (name awareness) in the market and the quality of your company reputation all factor into its valuation.

It’s important to look at your company objectively from both the buyer’s and seller’s perspective. Focus on the above items and you’ll be on the buyer’s radar screen. Don’t, and more than likely you’ll be just another guy or gal in a pickup truck.

Judith M. Guido, chairwoman and founder of Guido & Associates