To understand this process, it is important to understand what valuation is. "Valuation is not what you think or feel it is. Something is only worth what someone will pay for it,” Christopher Wick explains.
(For a deeper dive into valuation, see our blog post Understanding Valuation.)
SYE determines the valuation of a business by multiplying EBIDTA or SDE by their industry multiple. After understanding the industry standard for multiples, other factors that could increase or decrease the value of the company are also analyzed, such as, market data, competitors, assets and intangible value.
At this stage, SYE finds and verifies data to support the company's valuation. Sellers can and should state their proposed valuation for the company. Often, the seller will explain additional assets that support that valuation. About half of the businesses that start the discovery phase continue on to the valuation process.
When considering industry standards, SYE starts with finding the tax code for the business. The selling prices of other businesses in the tax code help to create a range of what their business is likely to be worth to buyers.
There are a variety of assets that can increase and decrease the value of a business.
For example, one of the largest factors that increase the valuation of a business are their financial metrics. If they are strongly profitable and showing upward trends of their financial performance, this will increase their valuation.
Another example, the most common issue that decreases the value of a business is a lack of employees. If SYE has to hire employees to keep your business running in your absence, that cost detracts from the value of your business.
At this stage, SYE does the majority of the legwork, and the seller answers any questions that come up. Seller’s control the momentum of the process with their prompt responses. SYE will only ask questions that are relevant to a sale, so prompt answers move the process even closer towards a sale.
Some buyers do not start due diligence until acceptance of an offer, but the process works in reverse at SYE. Due diligence happens during the valuation process. After acceptance of an offer, there is a smaller amount of little due diligence left to do.
Acceptance of an offer means that the seller can expect a closing within weeks, sometimes even days.