Mergers & Acquisitions

A Beginner’s Guide to Business Valuation

Lessons Learned from 20 Years in the Trenches.

Written by Jacob Orosz, President of Morgan & Westfield

A Beginner’s Guide to Business Valuation walks you step by step through valuing a business with $1 million to $50 million in revenue. You’ll learn the fundamental factors that determine the value of any small to mid-sized business and simple methods for maximizing value when it comes time to sell. This practical guide is based on what the author has gleaned from 20 years in the trenches selling businesses. It’s written for the layman, specifically meant to address the real-world methods buyers use to value businesses.

This one-stop compendium explains the most common valuation concepts and offers sound advice for anyone looking to sell a small to mid-sized company. A Beginner’s Guide to Business Valuation is a conversational field manual that simplifies a technical and complex area of practice with real-world stories. It explains valuation concepts in language any business owner can understand, without the jargon.

This comprehensive handbook is written by Jacob Orosz, one of the industry’s leading authorities on lower middle-market valuation, host of the M&A Talk podcast, and president of Morgan & Westfield, a nationwide M&A firm. Jacob has over 20 years of M&A experience and has valued and sold hundreds of businesses.

Accounting numbers are the beginning, not the end, of business evaluation

Warren Buffett

What’s Covered in the Book

The difference between valuing small and mid-sized businesses, as well as private and public companies

The 10 most important valuation concepts you should understand

Information on why the range of values can be so wide for a business

How to normalize your financial statements to calculate seller’s discretionary earnings (SDE) or earnings before interest, taxes, depreciation, and amortization (EBITDA)

Advice on whether you should use SDE or EBITDA to value your business

A no-nonsense overview of the most common valuation methods

A simple explanation of the ROI on businesses and how ROI differs from other valuation methods

An overview of the four types of buyers, their goals and criteria, and how to position your business for each buyer type

How a company’s reason for acquiring you can affect the price you receive

A review of over 50 factors that can impact the value of your business

Advice on transaction structure and how it can influence your net proceeds

Guidance on hiring a professional to appraise your business and how to avoid a 100% to 500%+ markup on an appraisal

A simple framework with over 100 tips for implementing a strategy to increase the value of your business

Overview

A Beginner’s Guide to Business Valuation is for owners of businesses with $1 million to $50 million in annual revenue. Most businesses in this size range can be sold to either an individual or a corporate buyer. Unfortunately, books on this subject often address only one of these potential markets. The advice in this guide is custom-tailored to businesses in this range to help you understand the benefits and downfalls of each type of buyer, as well as how to best prepare for them.

Discover the fundamental principles of valuing your business from an industry veteran in this straightforward book that blends the art and science of determining a business’s true worth. Explore the realities of business valuation in the real world, not the academic world, along with sound strategies for identifying and maximizing value drivers.

This book isn’t theoretical – it’s based on over 20 years of my experience as an M&A advisor selling and valuing businesses. I’ve dealt with thousands of buyers from strategic acquirers and corporate buyers to private equity firms and wealthy individuals. I will discuss where value comes from and walk you through a commonsense framework to increase the perception of value in any buyer’s eyes.

Find out why improving the value of your business isn’t as simple as boiling the process down to a few metrics; rather, there are hundreds of potential factors that can affect it.

You’ll learn how transaction structure can impact the value of your business, and the ground rules for navigating the sale process to maximize price. The inherent worth of your business is more than just its price. There are many other factors including how much cash down you receive, how transaction structure affects your proceeds after taxes, and whether part of the purchase price is dependent on future events that can impact the value you receive.

This advice is rooted in the reality where companies are actually bought and sold, not in the theoretical world filled by business appraisers, attorneys, and judges. While simple methods of valuation such as using EBITDA and multiples exist, they are rarely easy to apply and fully understand. A Beginner’s Guide to Business Valuation shows you how.

My goal is to equip you with valuable expertise to enhance your company’s value, increase its marketability, and capture the most value possible during a sale. This is a book about selling smart and achieving maximum value for the time and effort you’ve put into your company.

Arm yourself with practical knowledge that’s been proven over time. Order your copy today.

Table of Contents

Acknowledgments

About the Author

Preface

Acronyms

Additional Resources

Introduction

  • Why Valuation Is a Range Concept
  • Main Street vs. Middle-Market Companies
  • Public vs. Private Businesses 
  • A Note on Exceptions
  • A Note on Size

Chapter 1: Eight Valuation Concepts

  • Concept 1: Fair Market Value vs. Strategic Value
  • Concept 2: Small Market vs. Middle Market
  • Concept 3: Business Valuation Is a Range Concept
  • Concept 4: Buyers Don’t Always Follow Valuations
  • Concept 5: Terms Affect Price
  • Concept 6: Personal Needs Affect Value
  • Concept 7: Comparable Sales Are Rarely Comparable
  • Concept 8: Fungibility Affects Value

Chapter 2: Analyzing Financial Statements

  • Normalizing Financial Statements
  • Measuring Cash Flow
  • Which Measure of Cash Flow to Use

Chapter 3: Business Valuation Methods

  • The Two Most Common Business Valuation Methods
  • Method 1 – Multiple of Earnings
  • ​​Method 2 – Comparable Sales Approach
  • What’s Included in the Price
  • Valuing Synergies
  • Valuing an Unprofitable Business
  • Multiples vs. Return on Investment

Chapter 4: Obtaining an Appraisal

  • How Purpose Affects an Appraisal
  • What an Appraisal Measures
  • Timing the Appraisal
  • Types of Appraisals
  • The Standard of Value
  • The Type of Appraiser You Need
  • Choosing the Best Method
  • The Real Value of an Appraisal
  • Free Valuations
  • Average Price of a Valuation
  • The Valuation Process
  • Third-Party Appraisals

Chapter 5: How Buyer Type Impacts Value

  • The Different Types of Buyers
  • Reason for Acquisition

Chapter 6: Factors That Can Affect Value

  • The Industry
  • Competition
  • Products and Services
  • Customers
  • Operations
  • Staff
  • Finance
  • Legal
  • Economic Factors
  • Negotiating Skills
  • Marketability
  • Timing

Chapter 7: How Transaction Structure Impacts Value

  • Negotiating Transaction Structure 
  • Negotiating the Term Sheet or Letter of Intent
  • Financial Aspects
  • Earnouts
  • Transition
  • Asset vs. Stock Sale and Taxes
  • Entity Type and Taxes
  • Allocation of Purchase Price and Taxes
  • Holdbacks
  • Sources of Financing the Transaction
  • Representations and Warranties
  • Partial Transactions

Chapter 8: The Foundations of Maximizing Value

  • Building the Right Business for Your Buyer Type
  • Exploring Your Exit Options
  • Prioritizing Your Plan
  • Preparing Your Buyer List
  • Forming Your Deal Team
  • Maximizing Your Negotiating Position

Chapter 9: The Mechanics of Maximizing Value

  • Business Model
  • Growth Plan
  • Financial Metrics
  • Financial Statements
  • Operations
  • Customers
  • Franchise
  • Legal
  • Staff
  • Ownership

Conclusion

  • Additional Resources

Glossary

A Beginner’s Guide to Business Valuation

About the Author

Jacob Orosz

Jacob Orosz is President of Morgan & Westfield, host of the M&A Talk podcast series, and author of numerous articles and books on M&A, including The Art of the Exit, A Beginner’s Guide to Business Valuation, The Exit Strategy Handbook, and Closing the Deal. He has over 20 years of experience facilitating mergers, acquisitions, sales, and other business transfers with transaction values up to $75 million. 

What a company is worth depends on who wants to buy it.

Michael F. Price, American Investor

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