valuationNot technically a from-scratch startup, but I am looking to purchase and run my first ever company. I want to get a better idea of how I should go about valuing a company that is experiencing some troubles.
The scenario:
Obviously valuing a company is very subjective, and no one approach fits all. That said if anyone can point me in the direction of any articles/advice on valuing a declining business, that would be appreciated.
Much of your question hinges on what the standard industry valuation multiple is for this company. As you probably know, each industry usually has a multiplier that is used against a company’s revenues or even its net profits as a basis of its worth. I’d be surprised if there isn’t one for the company you’re considering buying.
That being said, it can be difficult to assess the impact of declining revenues, because there can be a wide range of reasons for why this is taking place. Is it because management is not competent? Is competition eroding market share? Is there declining demand for the company’s products/services? Theses are just a few considerations.
In answering this question, one can have a good idea whether the situation can be turned around and growth restored, or at least what it might take to do so. This will have an effect on forward-looking valuation.
You mentioned the company holds “an enviable portfolio of products and exclusive distribution rights”. As such, the play here could be to buy the company and license out the manufacturing/distribution of those products rather than continuing to try direct sales. This could be a factor for potential buyers.
Trying to turn a declining business around is capital-intensive and there’s no assurance of success, so it narrows the field of prospective buyers and gives anyone who’s a serious contender a better bargaining position to negotiate a lower price than they’d need to pay if there was more than one suitor.
If you’re serious about this then it might be worth your time and the cost to have an independent auditor examine the company and come up with a fair market value. There are many companies out there which specialize in business valuation, and the current owner (if they’re sure you’re serious) should be willing to cooperate with such a process. You do have a right to conduct due diligence prior to closing a sale, so having the valuation done would be of benefit to both parties.
I hope this helps.
Good luck!
A great rule of thumb is, “Don’t buy trouble.” And a corollary is, there is no valuation method for a failing business that needs turning around.
There are people who specialise in acquiring, fixing and selling failing businesses. But what you describe is barely a business, at best it’s a rusting asset with an employee attached.
OK, I’m exaggerating a little. But that’s the future you’re predicting. So the question isn’t, “What is this business worth?”, but “How can it become worthwhile for me to take it on and turn it round?”
Does the owner want out? If not, then now isn’t the time to negotiate. It’s human nature to think your business is worth a price that reflects the glory days. So stay in touch, and wait for the day the penny drops, and the owner realises that the cash cow is almost out of milk.
But if they’re just stuck in a rut, you have the basis for a negotiation. Personally, I’d position that less as a question about the value of the business and more about the value of your time and work. Make it a shared problem, and you may find a mutually advantageous deal - perhaps one that gives them an upside if you’re successful.
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