WIDGETS STOCK
WIDGETS STOCK
I need to come up with a simple equation for a small business?
The company is in engineering. All of our revenue comes from billing out for work done. ie we have no stock and don't manufacture widgets.
I have heard various simple calculations including the average revenue for the last five years plus assets (AR, cash and equipment) minus debt. Is that type of valuation reasonable?
well, valuatons are always difficult in a recession when acquisition financing is light and public companies using their stock as curency is tough due to the stock market.
you didn't say what kind of engineering, if its home and/or commercial construction related, any govt business, etc. right now no one would care about your historical boom time revenues, other than validating your projections. a buyer will want do dig in deep to the projections, esp now. there is no rubber stamp, it is not 1999.
either way, valuations should be based on
1) an absolute DCF (discounted cash flow) based on a 5 yr projection (which will be compared to historical esarnings/ ebitda/ cash flow)
2) comparable public company comparable valuations (for example EV/EBITDA) and factor in a liquidity discount / haircut (30%?)
3) a private equity IRR type valuation where the enterprise value would be at least a 30% return with moderate financing levels (3x - 3.5x ebitda)
4) a list of real recent comparable acquisitons and more importantly the price) of similar sized companies in similar of related industries
and perhaps, what cost savings a big company could achieve by doing a bolt on acquisition and where that leaves you based on #2
your 5 year projections are key, and and if the proposed obama stimulus infrastructure bill can be thought to benefit you levae that out but let potential buyers know as that could be a great tailwind and motivation to buy
number 4 is where the value added of an M&A advisor will really earn their fee, and know where to find the buyers and sell the company. fo the remaining "formulas" you will need full accounting projections (b/s, cash flow and i/s)
for how to do the others, you will need some corporate finance studying.
anyone can justify whatever number you're hoping for based on any of the above, thus the business of fairness opinions. if you want a real number in a depressed market you have to talk to someone who is active in that industry M&A wise
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