July 22, 2024
No matter how big or small the size of a company, any business owner considering a sale should obtain a valuation of the company as a first step.
While Business Brokers and Mergers and Acquisitions (M&A) Advisors both provide business valuation services, each has a distinct approach to the process. It’s imperative that business owners are aware of the two different approaches and how these may impact the eventual sale of your business.
The first thing to understand is that Business Brokers specialize in buying and selling micro- to small-sized businesses (typically businesses with an annual revenue of less than $5 million).
Therefore their approach to business valuations is geared towards marketing that business within the micro- to small-sized business landscape, the requirements of which are less arduous than the mid- to large-sized business landscape. As such, a typical business valuation by a Business Broker will encompass:
A Business Broker will start by considering various factors that impact the company’s worth. They analyze financial statements, market conditions, industry trends, and operational efficiencies to gain a basic understanding of the business’s value drivers.
One of the primary methods employed by Business Brokers is the market approach, which involves comparing the subject company to similar businesses that have recently sold. By examining transaction multiples, such as price-to-earnings ratio or price-to-revenue ratio, Business Brokers derive a valuation benchmark for the company.
Business Brokers also utilize the income approach to assess the company’s future earning potential. They forecast cash flows, discount future earnings to present value, and calculate the company’s net present value (NPV) or discounted cash flow (DCF) to determine its intrinsic worth.
In cases where the company’s assets hold significant value, Business Brokers may employ the asset-based approach. This involves evaluating the company’s tangible and intangible assets, such as real estate, equipment, intellectual property, and brand value, to ascertain its net asset value (NAV).
M&A Advisors specialize in guiding mid- to large-sized companies (those with an annual revenue of between $5 million and $150 million) through the more complex merger or acquisition process. As such, a typical business valuation by a M&A Advisor will encompass:
M&A Advisors take a strategic approach to business valuation, focusing on the company’s strategic positioning within its industry and its potential for future growth and expansion. They assess factors such as market share, competitive advantage, product differentiation, and synergistic opportunities to determine the company’s strategic value.
M&A Advisors utilize sophisticated financial modeling techniques to forecast the company’s future performance and estimate its value. They develop detailed financial projections, perform scenario analyses, and apply sensitivity analysis to assess the impact of various factors on the company’s valuation.
This includes calculating your company’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), the financial metric that measures a company’s profitability and cash flow by looking at earnings before deducting certain expenses. EBITDA is typically the first financial indicator buyers look at because it tells investors how efficiently a company operates and how much of its earnings are attributed to operations.
M&A Advisors also consider market comparables to derive valuation benchmarks. They typically use more advanced transaction multiples than business brokers, such as enterprise value-to-EBITDA (EV/EBITDA) or enterprise value-to-revenue (EV/Revenue).
One key aspect of M&A valuation is assessing potential synergies between the acquiring and target companies. M&A Advisors evaluate synergistic opportunities, such as cost savings, revenue enhancement, market expansion, and operational efficiencies, to determine the overall value proposition of the transaction.
It’s clear that the valuation services offered by Business Brokers and M&A Advisors differ markedly. This difference in approach can, in broad strokes, be summed up as follows:
Business Brokers typically specialize in facilitating the sale of micro-to-small businesses (less than $5 million in annual revenue) within specific industries or geographic regions. Their valuation methodologies are tailored to the needs of these niche markets, leveraging industry expertise and market insights to determine the company’s value.
In contrast, M&A Advisors typically work with mid-sized clients ($5 million to $150 million in annual revenue) and investors (private buyers and private equity firms), offering broader expertise across various industries and sectors. Their valuation analyses are more comprehensive and strategic, focusing on long-term value creation and growth potential.
While both Business Brokers and M&A Advisors handle transactions of varying sizes and complexities, M&A Advisors tend to handle more complex and/or larger deal values.
Importantly, M&A Advisors are adept at navigating intricate deal structures, regulatory requirements, and negotiation dynamics inherent in larger transactions. They provide strategic guidance and financial analysis to corporate clients and investors, facilitating successful outcomes in complex M&A transactions.
Business Brokers and M&A Advisors each bring distinct approaches to business valuation, tailored to the unique needs and objectives of their clients, depending on the size/annual revenue of the business.
Business Brokers focus on assessing the intrinsic value of micro- to small-sized businesses within niche markets, employing comparative, income-based, and asset-based valuation methodologies. On the other hand, M&A Advisors take a strategic approach to the valuation of mid- to large-sized companies, considering the company’s strategic positioning, financial projections, market comparables, and synergistic opportunities to determine its value.
By understanding the contrasting methodologies of Business Brokers and M&A Advisors, business owners can make an informed choice about which professional is best-suited to value their business and take it to market for the most successful outcome.
Interested in speaking to a M&A expert about your business? Woodbridge International offers free valuations for businesses with an annual revenue of $5 million-plus. Our experienced team of M&A Advisors is always available to answer your questions. Contact us today to set up an obligation-free meeting.