What's Your Company Worth?

Whether you're selling your business, getting insurance or sorting through estate taxes,
knowing your business's value comes in handy.

By Bill Fiduccia
Valuing a business is always an imprecise science, even with large-cap public companies. For
example, is the value of a large public company based on its market price? Its book value? Its
potential worth if broken into parts that have more perceived value than the whole? The answer
is, there are many ways to determine the value of a company. Perhaps the best way to
understand the value of any business, large or small, is to look at who's doing the valuing and for
what purpose. For example, we'll wager that you would value your family business differently for
estate purposes vs. a sale of the business. This is why in many instances, more than one value
can be correct.

Regardless of how a business is valued, there are both quantitative and qualitative factors that
play a role in a comprehensive appraisal. Many of the elements that go into a business valuation
can be classified in three categories:

"Hard numbers," such as historical profits, assets, cash flow and liabilities, are always
important in determining the worth of a business.

"Soft figures," such as income and cash-flow projections, can be very important to a buyer or
investor interested in the company.

"Intangible assets," such as patents, brand names, quality or reputation of management,

location, recipes, customer lists or goodwill often have a hand in determining the overall value
of a business.

As indicated above, two of the more common reasons to value a company are for a sale or for
estate tax purposes. Other purposes for performing a valuation might include acquiring insurance
coverage of various types, attracting a new investor or seeking a credit facility from a bank or
finance company.

The key considerations that go into any valuation include:

Company, competitor and industry information. How is your business performing, and how
does it compare to your competitors? What is the state of your industry? Is your business in a
growth industry or a declining one?

Analysis of historical financial statements. Ratio analysis such as return on equity or gross
margin is often helpful.

Projected financial statements going out three to five years can be particularly significant,
especially if they are recast to reflect the business without owner compensation. By recasting
statements, the value can be estimated as if the business were under different ownership or
managed under different circumstances.

Using a method of valuation that is appropriate for the purpose of the valuation.

Three popular approaches to value a privately held company include:

1. Balance sheet approach. This is the easiest way to value a business. It will more often than
not, however, produce the lowest valuation. A company's book value is simply a firm's liabilities
subtracted from its assets. Banks and insurance companies are often valued on this basis. Many
analysts believe that using an "adjusted book value" formula will produce a more accurate picture
because this method takes into account the fair market value of assets and liabilities rather than
a firm's "historical book." Liquidation value is another way of using a company's balance sheet to
arrive at a value. In this method, you simply calculate what's left after the assets are sold and the
debts are paid. What's left is the value.

2. Market comp approach. In this approach, private companies are compared to comparable
public companies. For example, if a similar public company is valued at, say, 23 times current
earnings, then that yardstick can be applied to determine the value of the private company. When
using multiples, private companies are usually adjusted downward because of the lack of liquidity
in exchanging shares for cash. Non-financial comparisons might include companies with similar
products, markets or industry criteria. Financial comparisons might include size (revenues),
EBITDA, cash flow, price to book, price to earnings or M&A comps.

3. Discounted cash flow approach. Simply stated, this means that an analyst capitalizes an
anticipated income stream or cash flow in the future. This is accomplished by discounting a
company's future income or cash flow at an assumed opportunity cost of capital. This is called
bringing future anticipated income to "present value." This approach will generally, but not
always, produce the highest value.

Most companies are valued for the purposes of a sale, merger or investment. For this reason, we
must mention the concepts of fair market value and investment value. Fair market value is the
value established between a willing buyer and a willing seller—it's just that simple. And even
though a seller and buyer may arrive at fair market value in entirely different ways, in essence, it
doesn't matter. Investment value, on the other hand, is generally regarded as FMV-adjusted
(upward) for the special benefits that a buyer accrues from acquiring the new entity. These
benefits might include cost savings or added purchasing power.

The good news is, regardless of the valuation method employed or how the value is determined,
no one can claim you're wrong. But do keep in mind that not everyone will necessarily agree with
your assessment and may question the underlying assumptions that led to your valuation. For
serious valuations, there are a number of professional services providers that specialize in
valuing private companies.
Financial performance
Average Revenue $42m
Average income (EBIT) $27m

Industry multiples
Industry Food Processing

Industry Revenue multiple 1.06 37

Industry EBIT multiple 10.83

Local risk estimate adjustment

Risk discount Factor 0% 0%
Company Valuation $168.5m

*important note a company is only worth what someone else will pay! No more/no less.
built by ngogerty@aol.com using data from NYU stern biz program July. 2002
 Jul-02
Number
Industry Name of Firms Value/EBITDA Value/EBIT Value/EBIT(1-t) Price/Sales
Advertising 32 7.29 10.18 19.21 1.31
Aerospace/Defense 67 7.55 9.89 14.97 0.88
Air Transport 43 4.42 7.54 11.77 0.35
Apparel 55 9.67 11.94 18.67 1.29
Auto & Truck 21 5.23 7.73 11.37 0.38
Auto Parts 67 4.12 5.86 9.01 0.34
Bank 449 8.59 8.59 12.86 NA
Bank (Canadian) 8 5.63 5.63 7.07 NA
Bank (Foreign) 5 5.71 5.71 7.61 NA
Bank (Midwest) 34 9.54 9.54 14.1 NA
Beverage (Alcoholic) 21 8.67 10.57 16.37 2.18
Beverage (Soft Drink) 21 12.83 16.41 23.5 2.87
Biotechnology 78 17.32 24.75 60.09 5.68
Building Materials 54 5.39 7.19 10.86 0.6
Cable TV 28 5.88 13.8 14.68 1.54
Canadian Energy 12 4.37 5.74 9.28 1.17
Cement & Aggregates 16 4.99 6.92 10.28 0.98
Chemical (Basic) 23 4.84 6.92 10.36 0.82
Chemical (Diversified) 33 6.96 9.49 15.52 1.54
Chemical (Specialty) 91 6.16 8.61 12.42 0.87
Coal 6 4.94 8.46 10.49 1.05
Computer & Peripherals 177 8.13 10.81 15.84 1.28
Computer Software & Svcs 452 9.47 13.32 23.53 2.72
Diversified Co. 101 6.47 8.44 12.03 0.61
Drug 285 12.07 14.22 19.46 3.82
E-Commerce 35 6.92 NA NA 1.59
Educational Services 35 15.67 23.3 48.84 2.88
Electric Util. (Central) 30 5.4 7.34 11.46 0.33
Electric Utility (East) 30 5.46 7.37 11.06 0.74
Electric Utility (West) 16 4.57 7.15 10.47 0.35
Electrical Equipment 96 8.23 11.14 15.13 2.54
Electronics 197 6.06 8.27 13.45 0.58
Entertainment 96 6.75 11.99 13.92 2.15
Entertainment Tech 26 10.19 48.95 62.03 2.02
Environmental 84 5.13 7.19 12.74 1
Financial Svcs. (Div.) 212 10.78 11.05 16.45 5.66
Food Processing 113 8.57 10.83 16.89 1.06
Food Wholesalers 23 9.03 11.49 17.75 0.46
Foreign Electron/Entertn 14 4.68 7.3 15.69 0.68
Foreign Telecom. 20 4.1 8.24 9.28 1.36
Furn./Home Furnishings 34 6.13 7.96 12.42 0.8
Gold/Silver Mining 29 4.9 6.69 10.77 0.28
Grocery 34 3.52 24.66 36.93 2.04
Healthcare Info Systems 18 4.82 6.31 9.57 0.57
Home Appliance 54 8.59 9.7 14.39 0.77
Homebuilding 86 6.51 8.75 12.83 1.15
Hotel/Gaming 33 9.65 12.05 17.94 2.28
Household Products 29 7.64 10.14 20.8 0.39
Human Resources 204 5.29 7.59 13.61 0.65
Industrial Services 24 11.06 15.79 22.8 3.51
Information Services 1 NA NA NA NA
Insurance (Life) 33 4 4 5.4 NA
Insurance (Prop/Casualty 53 NA NA NA NA
Internet 415 NA NA NA 2.18
Investment Co. 25 14.98 21.44 30.91 NA
Investment Co. (Foreign) 16 100.59 100.59 104.92 NA
Machinery 152 6.17 8.49 13.1 0.67
Manuf. Housing/Rec Veh 19 10.48 14.73 30.1 0.54
Maritime 20 4.49 6.29 8.46 0.55
Medical Services 215 6.77 8.53 14.47 0.89
Medical Supplies 229 12.64 15.49 22.07 2.12
Metal Fabricating 45 6.91 9.04 14.42 1.05
Metals & Mining (Div.) 49 5.97 8.61 13.77 1.05
Natural Gas (Distrib.) 35 5.09 6.78 11.91 0.68
Natural Gas (Diversified 39 4.39 5.71 8.31 0.26
Newspaper 22 9.9 13.26 22.1 2.49
Office Equip & Supplies 35 6.96 9.67 15.61 0.57
Oilfield Services/Equip. 86 7.49 10.2 16.31 1.81
Packaging & Container 39 5.05 7.13 12.88 0.57
Paper & Forest Products 42 5.23 7.47 11.37 0.69
Petroleum (Integrated) 37 4.25 5.34 8.97 0.88
Petroleum (Producing) 133 3.61 4.57 6.68 1.23
Pharmacy Services 15 11.7 14.87 31.23 0.63
Power 17 6.84 8.49 12.48 0.18
Precision Instrument 39 9.47 15.71 21.87 3.82
Publishing 110 5.77 7.96 11.7 1.21
R.E.I.T. 45 5.39 8.01 13.54 1.09
Railroad 153 NA NA NA 13.42
Recreation 16 6.11 8.18 12.73 1.35
Restaurant 94 8.68 11.73 15.43 1.69
Retail (Special Lines) 98 7.44 9.57 15.93 1.47
Retail Building Supply 188 7.38 9.81 16.63 0.76
Retail Store 10 13.38 15.59 25.27 1.4
Securities Brokerage 70 10.3 13.56 21.61 0.74
Semiconductor 29 4.61 4.79 7.22 0.97
Semiconductor Cap Eq 110 6.89 9.87 13.61 3.03
Shoe 13 7.37 9.35 12.94 2.76
Steel (General) 28 9.09 10.78 17.11 1.02
Steel (Integrated) 30 5.48 8.31 13.07 0.49
Telecom. Equipment 15 4.22 6.57 10.28 0.45
Telecom. Services 141 4.66 9.7 39.16 0.88
Textile 195 3.79 6.05 11.78 1.04
Thrift 22 4.46 6.8 9.73 0.22
Tire & Rubber 105 7.58 7.58 11.77 NA
Tobacco 18 4.12 6.12 8.61 0.33
Toiletries/Cosmetics 13 4.99 5.51 8.93 0.91
Trucking/Transp. Leasing 24 10.95 13.36 20.04 2.01
Utility (Foreign) 41 6.43 9.2 17.48 1.21
Water Utility 17 7.98 10.02 14.88 2.44
Wireless Networking 80 11.87 NA NA 0.87
Overall Market 7278 6.61 8.84 13.55 1.25
 Expected
Net Margin Growth
2.07% 13.07%
3.51% 15.22%
-1.78% 19.17%
1.86% 10.81%
-0.25% 11.98%
0.48% 12.86%
NA 10.52%
NA 11.42%
NA 11.50%
NA 10.06%
3.54% 11.00%
4.20% 20.17%
3.27% 36.31%
1.38% 13.24%
-8.27% 15.21%
4.26% 8.19%
2.78% 9.94%
0.37% 14.94%
2.54% 11.50%
1.32% 13.12%
0.55% 11.83%
1.17% 18.81%
0.64% 21.76%
1.65% 13.97%
6.38% 28.32%
-20.03% 23.56%
1.50% 23.71%
1.35% 6.77%
3.05% 8.11%
2.06% 4.77%
6.06% 15.59%
-0.32% 16.49%
-1.80% 19.33%
-4.82% 30.60%
2.25% 15.70%
16.69% 15.08%
2.15% 14.48%
0.91% 17.14%
0.02% 12.08%
1.27% 8.63%
1.70% 12.32%
0.84% 15.04%
-13.51% 25.23%
1.61% 14.44%
3.35% 12.79%
2.01% 14.60%
2.96% 11.39%
0.26% 20.60%
0.63% 16.68%
3.98% 16.01%
 NA 0.00%
NA 12.56%
NA 16.68%
-25.96% 34.23%
NA 0.00%
NA 0.00%
0.71% 15.95%
0.10% 14.43%
1.74% 21.75%
1.60% 21.28%
3.96% 23.51%
2.01% 21.04%
1.01% 15.37%
2.54% 9.34%
1.85% 10.21%
1.75% 12.47%
0.99% 11.10%
1.82% 20.26%
1.22% 15.63%
0.80% 14.19%
3.25% 5.98%
3.00% 13.40%
0.46% 20.94%
1.33% 14.88%
0.20% 10.19%
0.82% 17.17%
-0.38% 15.26%
44.22% 7.03%
3.96% 14.68%
1.95% 14.93%
3.03% 19.70%
1.35% 16.59%
2.67% 14.90%
1.09% 13.08%
3.62% 10.33%
0.75% 23.20%
-1.78% 18.40%
2.29% 12.43%
-0.85% 10.61%
-1.63% 11.17%
-6.11% 19.30%
-1.76% 19.72%
-1.19% 21.54%
NA 11.16%
0.17% 13.90%
3.69% 6.30%
3.60% 11.05%
1.92% 15.98%
5.44% 8.53%
-16.86% 25.65%
1.92% 16.79%