It All Begins with a Valuation
Professional business appraisers rely on three valuation approaches: the asset, market, and income approaches. One, or a combination of the three methods, are used to determine a company’s value. Most lower market intermediaries, such as business brokers, lack any independent professional business valuation experience, and few have earned meaningful professional business valuation, accounting, and finance designations. The business brokerage industry, compensating for its lack of valuation knowledge, tends to use either standardized valuation software or industry multiples, such as rules of thumb, to determine listing prices.
Business valuation software programs are designed for ease of use to accommodate the users’ lack of valuation knowledge. Industry growth rates, transaction multiples, and other vital metrics are based on the client’s industry code, often the SIC or NAICS code, which includes an assortment of business operations that differ considerably from that of the client. Consequently, the output generated from valuation software is unreliable, at best.
Most business owners are familiar with industry multiples, or rules of thumb. For example, a rule of thumb multiple might be “2 times sales,” meaning a company’s enterprise value is worth two times the company’s trailing twelve-month sales. Other rule-of-thumb-multiples widely used in the lower-market includes EBITDA (earnings before interest, tax, depreciation, and amortization expense) and SDE (sellers’ discretionary earnings). Rule of thumb multiples have a host of detrimental flaws and are best used as sanity checks against free cash flow-based models corroborated with adjusted transaction multiples.
It’s hardly surprising, or coincidental that non-valuation experts relying on faulty approaches to determine their clients’ selling prices have just over a 20 percent probability of actually selling.
We Don't Like Those Odds, and We're Guessing You Don't Either
Stone Capital’s comprehensive exit-planning process begins with a professional business valuation that goes much deeper than a rule of thumb guesstimate. Our in-house proprietary models apply contemporary finance, accounting, and economics principles to calculate a value that’s further tested by adjusted market multiples and rigorous tests of reasonableness. You’re more than an industry code. Our tested and proven valuation models were built with flexibility and precision to capture the company-specific intangible value elements that valuation software or rules of thumb ignore.
Unlike other intermediaries, Stone Capital takes both a sell-side and a buy-side approach. We look at the value through your lens (the “sell-side”), but we also assess the value from a buyer’s perspective (the “buy-side”) using the most current market data. Our proprietary RPP™ scenario analysis program delivers our clients price breakpoints, showing them what price they can reasonably expect, along with a minimum, or “walk away” amount, and a best-case scenario price. The RPP™ protects our clients from leaving money at the negotiating table while alleviating their concern of market overpricing – found with most lower market business listings – which prevents them from ever getting to the table.
Leadership - Valuation
Stone Capital’s extensive independent professional business valuation expertise is unmatched in the lower market. Zach Sharkey spearheads our valuation department. With nearly two decades of valuation experience, he’s one of three CPAs in Missouri accredited in business valuation (ABV) with the AICPA to hold the internationally-coveted CFA Charter. Zach is the author of the highly-acclaimed book “Business Valuation for Business Owners,” has written extensively on business valuation and succession planning, and has spoken at numerous events, both domestically and internationally.