Valuation is a topic that comes up over and over again in our conversations with business owners.
Most business owners will be familiar with the basic formulae, whether it is a multiple of EBIDA or a multiple of revenue.
Whichever multiple is preferred, there are two factors that will affect how high that multiplier will be i.e. risk and growth.
The higher the risk, the higher the multiplier, and vice versa. Likewise, the higher the expected growth, the higher the price.
However, according to Krzysztof Zdanowski, CEO of Summa Linguae Technologies, valuations can be very buyer-dependent and something that one buyer may value highly, may not interest others.
“There are many factors that are worth mentioning,” says Krzysztof.
“If you have a company that is enjoying a hyper-growth revenue, then you’re probably worth more. If you have a very interesting client portfolio, or you work for a very growing and interesting vertical of accounts, then probably you’re worth more. Or if you just have some of the secret sauce that the buyer might be looking for, then obviously you’re worth more.
“But I think it’s also important to understand what the real intention is behind a given company trying to buy my company, and the other way around. As a buyer, I will always want to understand why a seller wants to sell a business, and the other way around.”
Are some niches more valuable than others?
In general terms, particular niches will see higher multipliers and higher valuations, such as media and publishing, IT, legal, financial and life sciences.
While these niches will be particularly coveted by buyers, Krzysztof says any business that is experiencing strong growth that is above industry average will be equally interesting to buyers.
“I think generally, it’s no different from the general industry landscape or economic landscape. Anything that is growing faster than what our industry is growing on average is valuable.
“But again, it’s very buyer-dependent. What is interesting for me might not be interesting for someone else.
“Someone might offer services to all industries, but there’s one that they’re missing, so it’s not interesting to me, but that buyer will be very interested in looking at that niche.”
At what point should money be discussed?
Krzysztof says it’s important to start discussions about money early in the process, but remember that it is a process and it will take time to reach an agreement.
“When you think of selling your business, you mingle between industry peers and then maybe you hire a broker to help you. And then there’s a number of potential buyers and you start talking to them, you get calls and so on. And then this period ends with some sort of an LOI (Letter of Intent) or term sheet. And this is where the price should be discussed.
“And it’s fair to put that down into an LOI, which usually is guarded by some sort of an exclusivity period because then we as buyers will then on-board onto a time consuming and effort consuming and costly exercise of due diligence – going through legal and tax and ops and technology and everything else.
“And that process costs money and time. And hence I want some sort of an exclusivity so that when everything checks, I want to be able to actually complete the purchase.”
“Some good advice for all the sellers out there – if you’re engaging into an LOI with a company that you know nothing about, do your research.
“You can do a simple background check by calling a previous acquisition that a buyer has previously acquired.
“I actually do encourage all the people that are potentially thinking of selling their business to me to get on a call with one or two folks that sold businesses to me before.”
If you want to know more about this area, visit Lion People Global’s website where you can watch back our M&A Talks series of videos and fill out a questionnaire that entitles you to one hour’s free consultation on getting a LSP or language tech business ready for sale.