People like to think you can take some number off a company’s income statement, multiply it by some number between 3 and 7 and get a reliable conclusion of value for the business. While this DOES provide the answer to a mathematical equation, it does NOT provide the answer to “What is the value of this company?”
Business valuation requires we gain an understanding of both the quantitative and qualitative factors of a business. What do we mean?
Let’s look at the tale of two bakeries:
- The first bakery has been in business for 20 years, has built a solid reputation in the community. They bake everything at a central kitchen and then ship to 10 company-owned shops around the greater metro area. Each shop has as a bakery counter plus mini-cafe where customers can enjoy baked goods and coffee, tea and other beverages with friends and neighbors. The shops have long become gathering places.
- A second bakery in town just opened 2 years ago and has 5 locations--each leased in strip malls. Each location has its own fully outfitted in-house bakery with a counter for selling product to go; there is no seating or other items available for sale.
There is not a right or wrong answer here in terms of business model, but this simple example illustrates that even within one industry the business models, margins, real estate, vehicles, inventory, staffing needs, reputation, brand and cash flow requirements vary greatly and cannot be directly valued by using a simple multiple and a single number from the income statement.
It really is about “the story behind the numbers” of each unique business.
Stay tuned! We’re building a solution to make reliable business valuation available for your clients -- right from your desk.
Cathy is the President of Capital Valuation Group, Inc., headquartered in Madison, WI. Capital Valuation Group has been helping business owners across the country understand, increase and unlock the value of their businesses for over 40 years through keynote speaking, valuation analysis, determining damages and providing expert witness testimony. Cathy welcomes conference and event speaking inquiries and can be reached at reached at firstname.lastname@example.org.