What’s a business worth?

Our March M&A highlights report provide lots of multiples (and more) for the dozen plus sectors that we cover.

Hopefully, some of these statistics will be relevant to you. But, before diving into the some context may be helpful.

In our world, value tends to be driven by both financial factors and other less quantitative factors that affect supply and demand. The most important financial factors are simple – even if a lot of people seem to forget them: Expectations for Revenue Growth; Expectations for Profit Growth; and the perception of “Risk”. It seems obvious that a larger or faster-growing firm should command more value than a similar one that is smaller or growing slower. The same is true of profit. But, it’s important to understand that it is the expectation of growth that matters.

The fact that a company has had consistent high revenue growth – until last year is only relevant in the context of future expectations. Risk is a broad area that can include things such as perceived customer concentration risk; weak management; competition; technology; or dependency on one or two key people. Risk can be mitigated by market leadership and scale.

That is why, often, the multiples of the market leader are higher than the multiples of other firms in the sector. Of course, there are other financial factors that impact value such as the firm’s balance sheet and off-balance sheet assets. Clearly, a company with strong brands, proprietary IP, lots of cash and no debt should be more valuable than an identical one without these assets.

The non-financial factors affecting demand include being the flavor-of-the month and having a perception of uniqueness. It’s the combination of strong financials, uniqueness and being the right flavor that causes some firms such as Facebook to be valued at $50 billion, while other larger firms with venerable brands may trade at much lower multiples. In the m&a context, strategic fit can have both financial and non-financial implications.

So, as you can see, it’s about more than multiples. Recently, we helped sell a firm for more than 40 times cash flow. It was a competitive process and the buyer knew how much they could pay and still have a deal that made sense. They’ve owned the business for some time now and are quite happy with it. We like that.

Enterprise-Value / 2010 Revenue

Marlin & Associates is an independent boutique financial and strategic advisory firm and investment bank focused on advising owners and managers of U.S. and international companies that provide technology, digital information, and healthcare-related products and services. The firm is based in New York City, with offices in Washington, DC and Toronto, Canada and has been the recipient of numerous awards including “Middle Market Corporate Deal-of-the-Year”; “Middle Market Financing Agent-of-the-Year”; “Middle Market Financial Technology Deal-of-the-Year”; “Middle Market Financial Services Deal-of-the-Year”; “Middle Market Information Technology Deal-of-the-Year”; “Middle Market Professional Services Deal-of-the-Year”; “International Technology Deal-of-the-Year”; “Middle Market Computer and Information Technology Deal-of-the-Year”; “Middle Market Financing Deal-of-the-Year”; and “Middle Market International / Cross-Border Deal-of-the-Year”.  In addition Marlin & Associates has twice been named as the “Middle-Market Investment Bank of the Year.”

M&A’s senior members have come together from some of largest and most prestigious global companies. Our professionals include executives with operating backgrounds as well as investment bankers with extensive transactional experience. Together, they have advised on over 200 successfully completed transactions in eleven countries.

Debbie Stephenson

Debbie Stephenson is a former Content Marketing Manager at Firmex.