Intentional Growth #309: Demystifying Business Valuations: Methods to Value a Business, Normalized EBITDA, and Multiples
Ep. #1 [THEME THREE]
There are so many terms, philosophies, and methods regarding business valuations that many owners tend to ignore, or they delay addressing their company’s valuation until they want to sell, which is often too late.
In the previous theme, we covered how you can measure and monitor the value of a business–by integrating it into your company’s financials–while you own it. In order to do this, we need to understand how a company is valued and the key concepts and levers that influence that value.
Arkona co-founders Ryan Tansom and Pat Hobby are back to kick off the next theme: Demystifying Business Valuations. They explain the difference between intrinsic financial value and strategic transaction value and how they relate to normalized EBITDA, multiples, enterprise value, equity value, and finally how much money is going into your pocket after a sale (net proceeds). During this episode, Ryan and Pat unpack how companies are valued so you can begin to see–and run–your business like a financial asset.
//WATCH THE INTERVIEW ON YOUTUBE: Intentional Growth™ Podcast
What You Will Learn
- Why knowing the value of your company today is crucial to view–and run–your company as a financial asset.
- That intrinsic financial value +/- the purpose of the deal = strategic transaction value.
- Why the intrinsic value of a business is based on its cash flows.
- Why planning into the future using the intrinsic value of the company increases the options you will have when you actually want to sell.
- How to get a premium over the intrinsic financial value of a company.
- How the purpose of the deal and the buyer impact the transaction value.
- The difference between enterprise value, equity value, and net proceeds.
- How normalized (or adjusted) EBITDA works, how to calculate it, and why it matters.
- Why knowing the value of your company in real time helps you make decisions and in line with your long-term goals.
- The THREE numbers you should focus on in order to increase your net proceeds in the future when and if you decide to sell.
// USE YOUR FINANCIALS TO CLARIFY A PATH TOWARDS A MORE VALUABLE BUSINESS: Intentional Growth Financial Assessment
Bio:
Pat Hobby started his career as an auditor at EY and over the years held various finance positions before launching his own outsourced CFO services company. As one of his clients continued to grow and needed more assistance, he joined the company full-time for more than 20 years. He helped the company grow significantly, do acquisitions and eventually sell it to the employees via an ESOP. Two-and-a-half years later, he led the sale of the company to a PE firm—with tremendous benefit to the employees. Since then, Pat co-founded Arkona with Ryan Tansom to help owners grow the value of their company with an end in mind.
Interview Quotes:
09:35 - “Cash flow. Sustainable, predictable, and transferable cash flow.” - Pat Hobby, on what creates real value
10:27 - “The more sustainable, predictable, and transferable cash flow there is, the more it’s worth.” - Pat Hobby
12:47 - “There are things that. Affect the risk of that cash flow. When you start to realize those things you can address them and say, ‘How do I derisk my company?’” - Pat Hobby
22:40 - “In running the business, you want to get a true picture of the cash flow. How much is this business really generating as a business, excluding some of these one-time items.” - Pat Hobby
25:47 - “I want to be careful too. There are some adjustments to EBITA that can go the other way; they can subtract from reported EBITA to get to normalized EBITA.” - Pat Hobby
37:24 - “You want to watch that value go up and be on a path that will get you to a point where you have choices that you can do with your ownership, what you want with it.” - Pat Hobby
38:58 - “In order to measure progress, you need to know what the value is.” - Pat Hobby
51:35 - “Most people think their company is worth more than it is.” - Pat Hobby
58:41 - “When you start thinking about your business as an asset, and your goal is to grow the value of that asset, having good clean financials that are accurate, timely, and useful, is essential.” - Pat Hobby
Links and Resources:
The 5 Intentional Growth™ Principles (5 Videos to Help Clarify Your Vision)
Intentional Growth™ Financial Assessment
You can also reach out to me via email at rtansom@arkona.io, or on my LinkedIn.