Inflated Valuations

We lost a prospective client when another M&A advisor indicated that they could sell the prospect’s company for an inflated value that was about 75% more than our opinion of value. While we were disappointed to not get the engagement, RCAS remains committed to never suggesting an inflated selling price in order to gain a client(After considerable time on the market, the sale did not go through.)

The value of a company is what a willing buyer and a willing seller both agree is a fair price.

Certified business valuators use comparable sales data (if available) and a variety of mathematical techniques (coupled with some assumptions) to value a company. In the current market, these types of valuations tend to be conservative but consistent between valuators. They are particularly useful for estate planning, divorces, and in instances where there is more than one shareholder in a company.

Analysis of comparable sales is one part of any valuation. The “comp” data is typically provided to valuation databases by M&A advisors. Analysis of a recent list of comps used in a formal valuation, showed that of 36 comps listed, only seven were in the revenue range and only one was actually a comparable company. Accordingly, “comps” must be considered with a great degree of scrutiny and used only if they pass muster through a due diligence examination.

Those of us in the M&A advisory business use “multiples” of historical earnings to as an aid in determining the value of a company (and its future earnings). The multiple selected is based upon a number of variables including the type of industry, growth history, profitability, dependencies, projections, and value of fixed assets. .

While aggressive stock/bond and REIT investments can yield a high multiple, these investments have a much lower risk than investing in a company. This is because the investment is liquid and marketable (can be sold within 24 hours), is not dependent upon specific clients or suppliers, and is not dependent on key employees.

Investing in a privately held company is much riskier. It is not a liquid investment as it takes 9–12-months to sell. There is no open market of buyers, and there is a dependency on customers, suppliers, and key employees. Because of these factors, savvy investors in companies expect a higher return on investment.

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