On a daily basis, we get phone calls about companies that want to be sold and want to know how to value themselves. “What is my company’s value?” they generally ask and the answer is, “Well, it depends.” There are various key factors that affect the valuation of a company such as market conditions, growth rate, present and future cash flow, intellectual property, and many other conditions. However, ultimately the valuation of an asset is what someone is willing to pay for it at that given period of time.
Valuation as a Strategy
In recent months, HafeziCapital has been involved in various mergers and acquisitions and the valuation analysis is a key ingredient within the process. To achieve a good valuation we worked with clients for 36 months prior to the liquidity event to restructure the company, clean up its balance sheet, and decrease the overall corporate risk while increasing enterprise value. We looked at key factors such as short, medium and long-term liabilities and developed key strategies that the firm could implement to achieve a higher selling price. Increasing the value was a core part of the core corporate strategy as well as the exit strategy of the organization. Acquiring companies will look at past performance indicators as a key component in developing a valuation. Thus, having a quarter-over-quarter improvement of Key Performance Indicators (KPI) will have a very positive effect on valuation.
Because of our work, the acquirer paid a premium for the corporation. Ultimately, companies care about the overall risk of the acquisitions and how it’s going to impact the bottom line of the company. Every merger & acquisition affects the bottom line in one way or another, but as an acquirer you want that acquisition to add exponential value to your bottom line. If you believe that the risk associated with an acquisition is lower than others and the returns are higher you generally are willing to pay a premium.
Valuation based on Industries
Each industry has a specific valuation structure based on various components. For example how you value a government contracting firm that is a sub varies greatly than of a contractor that is a lead. The multi-year value of a contract and its expiration are also key elements in valuating a firm. The manner by which you value a retail player, a medical or dental practice, a service provider, or a technology firm are different and require a diversified toolbox. Each has its specific multiple within the industry and they play by different rules. HafeziCapital has developed various valuation models that take these key indicators into account and values each accordingly.