Business Valuation - Cost and Recommendations
July 28, 2021
by a searcher from University of Pennsylvania - The Wharton School in Miami, FL, USA
Hello SFers
I am looking to buy out my 50% partner.
In doing so, we agreed to get the business valued by a professional valuation firm. Is there anyone who can provide:
1) range of cost for such a valuation (business is approx. $4M revenue and $1M EBITDA )
2) recommendations of those who perform such valuations
3) samples of valuation reports.
Thank you
from Northwestern University in Chicago, IL, USA
As such, let me propose how you can go about valuing the business. A couple factors to consider:
-The easy part of this is the EBITDA (or whatever earnings metric you valued the business with). Let's say at the time of close, you had $2mm of EBITDA; now, you have $3mm. Your partner should be entitled to the $1mm of EBITDA growth in their valuation since they were around for it
-The harder part of this is the multiple - here are some of the things to consider as you consider your multiple:
-How much has the growth trajectory of the business changed? If you did the deal with a 2% growth rate assumption and now that growth rate is closer to 5%, you would expect the multiple to expand
-Has the risk profile of the business changed? If there is a new regulation that could potentially derail the industry that wasn't there at the time of the deal, you would argue that the multiple could have room to be discounted (to account for that greater risk)
-Have public comps traded up? If you have good public comparables and are able to see how much their valuations have changed since you closed the deal (say the public comps averaged 8x at close and they are now trading at 10x), you can argue that your partner should see the benefit of some of that multiple uptick in their valuation
-Are there any other cash flow items that have materially changed since the time of the deal? A business' valuation is ultimately a present value of all future cash flows - thus, if capex is less intense, corporate taxes are lower, working capital is better managed, etc., your partner should see an uptick in valuation because the cash flow profile of the business has improved. NOTE: this is somewhat double-dipping against the multiple concept (since multiples capture these changes), but figured I would flag it anyways
-I would say if you're going to spend some money, have a light QofE done so that the earnings metric you're using is an accurate and fair figure. If you are in good control of your financials, you can probably avoid this, but just wanted to mention where a third-party advisor would be the most helpful
Once you figure the above out and arrive at TEV, the calculation of equity should be fairly straightforward. You would simply subtract debt, add cash, and subtract preferred equity (after the compounding hurdle rate) to get to common equity. At this point, you would need to figure out how to approach the vesting of the incentive units. Your transaction documents would likely have some stipulations, but absent me knowing what's in there, here's a few things to consider:
-Deal-based vesting: more likely than not, the deal-based vesting units should be fully vested and attributable to your partner. The point of this tranche is to compensate you for finding the business
-Time-based vesting: your partner should be entitled to any vested units if they hit the cliff vesting timelines. If you're midway through the year (and you have a one-year cliff vest), you could give them a pro rata adjustment, though that would be out of goodwill (and not market convention)
-Performance=based vesting: these will vest based on the return as calculated by the equity value you derive above. Your subscription document should have a formula to help you determine what %-age of units have vested.
-However, you MUST BE CAREFUL with this approach, as IRRs look great when calculated early on in a hold period. Thus, if you're only in year one, your partner will likely benefit from the distortions that IRRs suffer from due to timing (this is why private equity firms love using dividend recaps - they juice the IRR math in favor of the sponsor)
One final note on the common equity piece is working capital (which ultimately impacts cash at the time of valuation). If working capital is highly volatile, there could be an argument to adjust for working capital. That said, this exercise is incredibly painful and probably not worth the headache
from The University of Chicago in Chicago, IL, USA
1) Typical valuation is for the whole business. It assumes 3rd party will re-leverage. Say P=5000 consisting of E=1000 and D=4000. Seller gets 5000 cash. The 50% selling shareholder expects 2500 cash. Where would the buying shareholder get 2500? Put more debt on the books? Is selling shareholder willing to take a note or future payments (consulting, salary, etc.). Such factors have to be considered in valuing.
2) EBITDA could be different for 3rd party sale vs. partner buyout especially if there are excess salaries and benefits.
3) 50% purchase is a Stock purchase. And it depends on C Corp. vs. S Corp b/c entity cannot be changed,. I do not know of any tool that address these variables except BuisinessValueXpress (BVX).. I developed it, You can download from www.BVXpress.com. It is an interactive tool for live what-if analysis of value (if ROI is given) or IRR (if value is given) under different structures. .
4) My main practice is M&A (sell-side and buy-side). We don't value, except have done few valuation for partial buy-out due to the BVX software. In most cases the payment has been some cash plus future payments (Seller Note,, but often a non-working salary for retirement purposes). Have not seen more debt on the books to cash out selling partner.
5) For a sale to a 3rd party, seller gives R&W. No such thing from a 50% selling shareholder.
6) Market multiples do not have clarity on Stock vs. Asset and C vs. S Corp.
7) In 2019, an attorney asked me to value a business for one brother to buy out 2 brothers (each 1/3). I gave my valuation under certain assumptions. Our report is an Excel output of few pages. My value was ~$100 M. After my report,, I was sent two formal valuation reports (one by a firm with 10 certified appraisers and other with 30 appraisers, all with CVA or mostly ASA certification).. Their value ranged from $50 M to $140 M. I had to explain the differences. None had considered Stock purchase and C Corp, and one had used market multiples and overlooked non-operating assets.
8) Feel free to DM. No strings.