? re: Value of a Company

Do any of you guys have opinions on how to value a company?

I work at a Civil Engineering company and I want opinions other than my boss' opinion on how to come-up with a price of the company.

Thanks.

You looking to buy your Engineering firm ? Remember, the Value of a company is what someone is willing to pay for it

There are formulas to calculate it. Although we have never valued ours, I would think what we calculate wouldn't really be a right number.

The easiest way to look at it is the Assets (Equipment, software, etc.) and it's depreciated price. that, Coupled with revenu should give you a fait return on what you're paying for it.

I looked into a buisness one time and a fella told me that the buisness should cost what it nets in 3 years. I'm not sure that is any science behind that, but it was how someone looked at buisnesses.

One thing you need to know is sometimes the buisness that you are buying is the person that is selling it to you.... What I mean is, if the owner does the marketing and everyone likes that person. You have to know if you can keep the clients once that individual leaves....

I'm also interested in the replies.

I've googled a few ways and this article looks interesting and brings up some good points.

http://www.inc.com/magazine/20050401/nbrodsky.html

http://www.inc.com/magazine/19990201/724.html

http://smallbusiness.yahoo.com/r-article-a-112384-m-2-sc-52-whats_my_business_worth-i

There are seven accepted methodologies for business valuations. The two most widely used for professional service companies are 1) Capilization of Excess Earnings and 2) Discounted Future Cash Flows.

Both are based on the method of how goodwill or blue sky will be valued. Since goodwill is the majority of value in any service business, this makes sense. Hard assets are easy to value. Goodwill has so many nuances, that valuing that can be difficult.

If you are a productive employee who has been with the firm for a long time, he would be a fool to not work with you on it.

Does he/you have a written buy-in option as part of your employment agreement? If not, one would be helpful. It will lay out the valuation method, payment terms, and criteria you must meet to be offered ownership.

Don't either of you engineers take this the wrong way, but engineers seem to think they can do these things by themselves and never involve attorneys or accountants, to save costs. Every time engineers try to do these things by themselves, it gets fugged up worse than a football bat. Thus the statement, "So long as their are engineers, their will always be accountants."

Thanks guys. I knew I could get some info from this site.

My boss is willing to give up a portion of his ownership in the company (he owns 100% of it now) and he wants me to pay 1/3 of the percentage that I would get. In other words, if he wants to give up 30% of the company to me, and the company is worth X, then I would pay .3X/3 for that 30% of the company. My payment would just get subtracted from my bonus each year, for a few years.

He is looking at the value as how much the company has billed the last 3 years.

Tonight I'll have to read those articles that Moosie posted links to and I'll do some research on "Capilization of Excess Earnings and Discounted Future Cash Flows."

Curly, What if you don't get a Bonus? If you are to look at paying for your Buy-In with a Bonus, I would look at the Here and Now of the upcoming jobs to generate that Bonus. I would'nt sell a portion of my business or buy a piece of a business unless it was 50% at least. Otherwise you are suppling the Gentleman a loan. John

Curly said:

Thanks guys. I knew I could get some info from this site.

My boss is willing to give up a portion of his ownership in the company (he owns 100% of it now) and he wants me to pay 1/3 of the percentage that I would get. In other words, if he wants to give up 30% of the company to me, and the company is worth X, then I would pay .3X/3 for that 30% of the company. My payment would just get subtracted from my bonus each year, for a few years.

He is looking at the value as how much the company has billed the last 3 years.

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Curly:

On the surface, this sounds like a good deal, based on my clients who are civil engineering firms. The valuation method sounds like it would be to your benefit, unless he is talking about gross billings that includes a large amount of sub-contractor costs. Gross billings can be inflated by billing out sub costs, which have little, if any profit, compared to billed cost for associates time.

Good luck.

He is looking at the value as how much the company has billed the last 3 years.


I would be very skeptical of a valuation that uses gross revenues or "billings". I know a company that "bills" $15 million per year but only nets $150,000. Certainly isn't worth $45 million.

I suggest you calculate the cash flow, usually net income plus depreciation and interest, along with owner draws in excess of earnings. Use that number, and then divide by a reasonable cap rate (return on your money). If the cash flow is say $100,000 and you feel that a 10% cap rate is a good return the value of the business is $1 million. Cap rate usually reflects the risk of the earnings, and since it is just the business value (not assets) it should be at least 10%. But thats just my opinion.

I agree billings are wrong. I've also never seen an accountant's valuation of a business that I thought was truly close to market price (no disrespect intended, Bigfin).

I would think that 2 to 3 times EBITDA would be correct (Earnings before Interest, Taxes, Deperciation and Amortization). Essentially, what Moosie said earlier without spelling errors.

brymoore said:

I agree billings are wrong. I've also never seen an accountant's valuation of a business that I thought was truly close to market price (no disrespect intended, Bigfin).

I would think that 2 to 3 times EBITDA would be correct (Earnings before Interest, Taxes, Deperciation and Amortization). Essentially, what Moosie said earlier without spelling errors.

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No offense taken Brymore.

2 to 3 times EBITDA will essentially be a 33% to 50% capitalization rate of current cash flows. In pass through entity, which any of my professional service clients operate as, there is no tax at the entity level, so we are talking EBIDA. If the purchaser is making a cash purchase and eliminating all debt and therefore interest expense, which is not the case here, we would eliminate the "I" and look at EBDA, which is "operating cash flow," one of the valuation methods we normally see for personal service businesses.

Knowing the normal margins under which civil and other engineering firms operate, a "billings" valuation as Curly explained above would msot likely result in a much lower ending value than any of the other methods, helping Curly's cause.

If billings are inflated for billed costs, or this firm has a very low profit margin as a percent of gross billings (compared to other firms) then Curly might not get a good deal, thus my disclaimer above. As IDHunter noted in his example above, a very low margin can exist, but that is very seldom the case in engineering firms. If his example he listed was happening at an engineering firm, they had better find a new line of work.

The reality of this, and all small business sales, is that the "selling price" (not necessarily the valuation) ends up being somewhere between what the buyer will pay and the seller will accept. Sounds overly simplistic, but having helped hundreds of businesses be bought and sold, it quickly becomes obvious that "valuations" are irrelevant if they come in higher than a buyer will/can pay and lower than a seller will/can accept. Thus the reason buy/sell agreements with formulas and methodologies are so helpful. If you like the price determined under the formula, you go forward. If not, I guess you shouldn't have signed the agreement.

Curly asked how to "value a company." To value it is one thing. Whether or not the value will be acceptable to buyer or seller is completely different.

Good point Big Fin that I didn't address-no my example wasn't a civil engineering firm. Certainly higher profit margin business will have a different cap rate. Cap rate should reflect risk which includes small margin.

I still don't like to rely on gross sales, in the case of a business, "nets" are for more than fishes.

Moosie in his wisdom said the "business is worth what someone will pay for it"....how true.

IDH, People don't think I know a Buttload of Crap about stuff... But I do .. !!

Moosie said:

IDH, People don't think I know a Buttload of Crap about stuff... But I do .. !!

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Since you only seem to need about an hour of sleep a night, you have lots of time to study up, about crap and stuff.

Why don't you take the day off and go fishing or something?

IDHunters said:

Since you only seem to need about an hour of sleep a night, you have lots of time to study up, about crap and stuff.

Why don't you take the day off and go fishing or something?

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HAHA !! Truth be told I need alot of sleep. Right now I'm about at my Crashing point. Every couple weeks It happens and I[m in bed all day. Probably not healthy, but such is life sometimes But the Fishing day off was great... although still alot of work !!

So.... hows the company research going ?