Value Drivers #7: Money, Time, and Risk – What Are They Worth?

I'm often asked what the purpose of valuing a business is. “Can’t you just look at the multiples in my sector on an acquisition platform?” That’s certainly true, and I use these multiples as a sanity check. But what do these multiples actually say about your business? After all, they are averages per sector. What if that sector consists of many different sub-sectors, like business services? You can't compare an advertising agency with a staffing organization, can you? Moreover, large and small SMEs are mixed together, and we know that larger companies (with EBITDA starting from 500k) attract more interest and are often sold for higher prices than smaller ones. Additionally, these multiples are based on prices paid in a certain period, which means they’re based on historical information. But does that really tell you anything about the value of your business? Value is not the same as price.

If you want a well-founded estimate (it will always be an estimate) of your business's value, we need to dig a bit deeper. What factors play a role in determining value? Let me guide you through them.

Money
A key element is the amount of money you generate in the business. Don’t confuse this with profit, which is an accounting term. It’s great to see that you made a profit at the end of the fiscal year, no doubt. But it’s even better if you have cash available during the year—what we call 'free cash flows.' With that, you can invest, enter new markets, make acquisitions, and pay off debts. In other words, earning more money, which increases value. You can't buy anything with profit, but you can with cash in the bank. That’s why we primarily look at the cash flows being generated.

Time
Time is another important factor in valuation. For example, in cash flow methods, we look at future free cash flows to determine the current value of the business. Why do we do that? The reason is that a euro you receive now is worth more than a euro you will receive in the future. How certain is it that you will actually receive that future euro? A buyer thinks the same way: for them, that future euro is worth less now because there's a risk they might not receive it later. This again depends on the risk profile of the business they are buying—the last important factor.

Risk
When determining the risk profile, we focus specifically on your business and the circumstances and markets in which you operate. We assess dependencies, flexibility, your track record, and various other aspects that contribute to whether your business has a higher or lower risk profile. The result of this assessment impacts the value of your business. The lower the risk, the higher the value. And vice versa…

So, as you can see, if you want to assess whether the price a potential buyer offers is realistic, make sure you have an idea of your business's indicative value.

Want to know more about how we approach business valuation? Feel free to contact me or my colleagues.