Small Business Valuation is the defining dimension of measuring your organizational success. The reasoning behind obtaining a Small Business Valuation may be as complicated as a divorce, shareholder disputes, buying or selling a business, raising capital, required documentation for a shareholder agreement, or understanding what an exit could look like for you. Whenever individuals come to HafeziCapital to review their business valuation they have a lot of questions that need to be answered. Some of the typical questions are:
- What is my Small Business Valuation?
- How much is the Company worth that I am buying?
- How much can I sell the Company for?
- How much have my competitors sold/bought for?
- What is a healthy multiple for my business?
- What are the market effects on the price of my company?
- What is a reasonable price to pay for the company I am buying?
- How can I increase the value of my business?
Individuals invest in an asset class, with the clear intensions to grow the value of the asset above the capital invested, risks associated with the investment and the time value of money. For most small and medium businesses, it is also a retirement objective. Small Business Valuation allows owners to obtain a Snapshot in time as to where they are with their investment. For many small businesses their business is their largest investment, thus knowing where they are at with the value will help them define the exit for the company. Ultimately, value is a particularly helpful measure of performance given that it takes into account the long-term interests of stakeholders within a Company.
Small Business Valuation approaches
Small Business valuation is achieved via three key valuation methodologies. The three key approaches are:
- Asset-Based approach
- Earnings Value approach
- Market Value approach
Based on your specific industry, business model, customer type, growth stage, and other key inputs, HafeziCapital will decide which model to use in order to value your business accordingly. Each of the models present a specific advantage in optimizing value for your organization. HafeziCapital’s Small Business Valuation team’s job is to obtain all the relevant information and provide an opinion on your Small Business Valuation.
Small Business Valuation is impacted by the various key inputs that drive valuation. Items such as Cash Flow(s), Margins, Growth rate, Competitive Advantages, tangible and intangible assets are some of the ingredients that go into calculating Small Business Valuation.
Small Business Valuation reports
HafeziCapital’s Business valuation team have developed two products to help Small Business achieve their valuations objectives at a reasonable price. They are Long Form Small Business Valuation and Snapshot Business Valuation.
Long Form Small Business Valuation Report
If an organization or its members are undergoing Divorce, Shareholder Disputes, Buying or Selling a Business/Asset or undergoing Capital raising endeavors, HafeziCapital has developed a detailed Long Form Small Business Valuation report. Such reports include Economic Review and Outlook, Industry Review and Outlook, Financial Review, Financial Ratio’s and Projections, and the Valuation and the methods used to determine the value of the organization. This requires a detailed analysis of the organization, interviews, review of the Company’s balance sheet, income statement, and cash flow analysis. HafeziCapital has to understand the business the company is in, its client base and potential growth objectives. HafeziCapital’s Small Business Valuation team must also understand the assets the organization owns that will affect the valuation of the company. If the company is within the Government Contracting space, understanding the values of the contracts and options of the contracts. These types of engagements are very detailed and thorough are require between 30 to 45 businesses days.
Snapshot Small Business Valuation Report
This type of a report is a two-page quick valuation of the company for organization with limited requirements. The Snapshot Small Business Valuation is a “ballpark” estimate of where the organization is today. For owners and shareholders of organizations, this can be an easy way to measure the performance of the organization or set goals as a means to exit a firm. Snapshot report are used for Insurance assessments, or initial shareholder organization documents. The turn around time for Snapshot valuation reports is typically seven to ten business days.
Premium Pricing and Valuation
Small Business Valuation is impacted by Price Premium’s for their products and/or services. Price Premiums are defined as customers willing to pay more for your product or service, given the perceived value provided. Given that Price Premiums impact organizational Cash Flows, they also impact valuation of a firm. Buyers would be willing to pay more for a perceived higher quality company. When HafeziCapital is implementing a Small Business Valuation analysis, we review and analyze the pricing power of corporations and thus take Price Premium into account where we believe it impacts valuations.
A great example of Price Premium is differentiating a company such as Apple with Dell Computers. Whereas Apple is a software maker and a product design firm, Dell is mostly an aggregator with some design elements. Dell Laptop’s are generally cheaper in price than Apple’s although they produce a larger volume of product offerings in the laptop and server space. The correct market also has placed a larger value on Apple than on Dell.
Increasing Small Business Valuation
HafeziCapital’s consulting arm, can help organization in defining ways in which organizations can increase their value. The analysis will allow organizations to see where they are at and what structural and organizational changes they have to implement to increase small business valuation. This process should be implemented between three to five years prior to structuring an exit and it will allow the company to be as clean and as lean as possible to achieve an exponential growth. Such analysis also allow the organization to understand what key elements they have to implement to achieve a higher valuation.