Your Business: What’s It Worth to You?
As we’ve seen more than once in recent years, well-off political figures can embarrass themselves when they give mushy answers to questions about how much personal wealth they actually have. The printing business, thankfully, doesn’t bear much resemblance to politics. All the same, you shouldn’t think about “campaigning” in the M&A marketplace unless, and until, you have a firm handle on your company’s valuation.
If you haven’t performed a valuation recently—or if you have never established a valuation at all—you have plenty of company. Most printing business owners do not know precisely what their firms would fetch in a sale or how credible they would be to lenders in an attempt to borrow capital for an acquisition. Why bother doing a valuation, the reasoning goes, if the owner isn’t thinking about selling the company or buying another one?
One answer is that because M&A opportunities can strike at any time, every owner should be proactively armed with this information. Another is that a professionally executed, annually updated valuation is a powerful tool for strategic management. It pinpoints ways to increase company value as it simultaneously roots out problems that could cause a company to lose value.
New Direction Partners has performed more valuations in the printing industry than any other consultancy, and that experience has taught us to identify a number of factors that enhance a company’s value. These include:
- the existence of a solid business plan, as covered by NDP’s Tom Williams in his recent post on the subject
- profitable revenue growth
- strong cash position and good quarterly cash generation
- high EBITDA (earnings before interest, taxes, depreciation and amortization)
- little debt
- horizontal and vertical market penetration, with an emphasis on fast-growing markets like digital print, color, wide-format, and solutions for digital books and photo products
- strong growth from existing customers and an equally strong prospect list
- a capable and stable management team
In contrast, valuation suffers when there is:
- no revenue growth, or in the worst case, declining revenue
- low or negative profit
- a high percentage of revenue concentrated with one customer or a few customers
- a weak management team and/or weak management processes
Most valuations are done using either of two methodologies: EBITDA multiple or net assets. For companies with strong EBITDA, EBITDA multiple yields the highest valuation. Valuation by net assets (accounts receivable, inventory, plant and equipment, and goodwill) is for less profitable businesses and for those acquired in tuck-ins. (NDP’s Paul Reilly and Peter Schaefer address the methodologies in detail in this article.)