Investment Tips

Valuation Tips
Date : 17 December 2012

Definition of Fair Market Value

Fair Market Value is defined as the price at which shares of common stock of a closely-held company would change hands, with both Buyer and Seller having full information about the company and neither party acting under any compulsion to complete the transaction.

Factors That Drive Value

1.    Financial Factors (usually the most important factors)

·      EBITDA (earnings before interest, income taxes, depreciation & amortization)

·      Value of Assets (book and market value)

·      “Clean” Balance Sheet (good & collectible accounts receivable, good & saleable inventory, low debt to equity ratios, high working capital ratios)

·      Audited or Reviewed Financial Statements (not compiled)

·      Solid Financial Infrastructure (high level of “back office” automation & integration)

·      Ability to Forecast EBITDA Accurately for 3-5 Years

·      Growth Strategies in Place and Well Documented


2.    Proprietary Technology/Products (Can Trump Financial Factors)

·      Patents

·      Sole Right to Manufacturer a Product

·      Sole Right to Distribute a Product

·      Protected Market Area

·      Unique Manufacturing or Marketing Process

·      Unique or Innovative Product or Service

·      Superior Technology

·      Industry Leader for Product


3.    Customer Base

·      Diversity (no single customer more than 10% of revenue)

·      Years a Customer (the longer the better)

·      Written Contracts that are Transferrable (for at least a 1 year term)

·      Financial Strength of Customer Base (no major customers in distress)

4.    Suppliers

·      No Single Supplier Dominates Purchases

·      Major Suppliers Can Be Easily Replaced

·      No Major Supplier Is In Financial Distress

5.    Management

·      Management Infrastructure At least one layer of Management beneath Owner

·      Company not dependent on Owner’s daily presence

·      Succession plan in place

·      Resume Strength of Management Team 10+ years of experience

·      Proven Track Record of Performance


6.    Employees

·      Low Employee Turnover

·      High Skill Level of Employees

·      Non-Union Employee Base (preferred)

7.    Competitors (compare company to competitors as follows:)

·      Size

·      Years Established

·      Industry Reputation

·      Strength of Product Line

·      Pricing of Product Line

·      Diversity of Product Line

·      Unionized Work Force

·      Level of Automation

8.    The Industry

·      Barriers to Entry

·      Industry Trends

·      Size of Marketplace

·      Position Within Marketplace

9.    Risks

·      Environmental

·      OSHA

·      Litigation

10. Timing (when to sell)

·      EBITDA is peaking but not too close to the crest

·      EBITDA is sustainable

·      Debt is low

·      Technology is stable and not in transition

·      Management contracts in place

·      Economy is stable

·      Industry outlook is good

Valuation Fallacies…

·      I can sell my Company for the same multiples as the large public companies.

·      Historic performance does not matter; my Company will be priced entirely on future earnings.

·      Companies typically sell for a multiple of sales.

·      My industry/Company is different from other industries/companies, so typical valuation techniques do not apply.

·      Timing doesn’t matter.

Value Lost Because…

·      Too close to the Company to understand its true value.

·      Too removed from the M&A market to understand its pitfalls.

·      Failure to: Effectively present the Company’s strengths and future earnings stream

·      Structure purchase price to obtain the highest after-tax value

·      Develop a comprehensive database of potential Acquirers

·      Identify, quantify and capitalize on the synergies created with each potential Acquirer

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Bettina in 20 March 2019 said:
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