ExpertCEO

I have been trying to get a grip on organizational valuation in service oriented businesses but seem to be getting a variety of answers. Just want to throw this out in this forum to see what answers I get.

How do you value a company that is in the service oriented sector with limited assets (e.g. no machinery, building etc). 50% of revenues are renewable and the other are one time revenues with clients that are repeat customers -- so the potential of more business is there.

Lets take for example what is a company with 10 million in revenue and roughly 20% of revenues as EBITDA worth? At least half of the revenue is renewable for the medium term (3 to 5 years), and no more than 25% of revenue is from one client... Clients that represent any more than 10% of revenue are very stable and have almost no chance of going insolvent. Growth of this company has been at least doubling of revenue year over year. Zero debt. Company is four years old with 30 to 40 full time employees.

The technical answer to your question is that there are multiple acceptable methods for valuing a company which is why you get multiple answers. What you intend to do with the valuation will influence the method used.
In the world of finance theory there are four main formulas all of which result in slightly different results. Most valuation work will use all four methods and provide a range for the valuation. In addition to this complexity, some industries adopt a preference for one method over others when valuing companies for sale. For example, Banks tend to be valued on assets, and BPO companies tended to be valued on multiples of committed revenues. As a general rule, pay attention to articles about acquisitions in your industry. How do they report the value of the deal? If the acquisition is done by a public company, there will be reference to the price paid and a "multiple". The multiple will give you a clue regarding the relevant valuation method.

Without knowing more about your situation it is hard to give you more direction. I would be happy to discuss this off-line if you wish. fmiltenberger@onyxassociates.com

I agree with the above comments, although only one or two models usually apply to a given business (service versus distribution versus manufacturer). The best measure at any given time tends to be the latest sales (public and private) for companies in the same industry, with comparable size and EBITDA and similar client dynamics and growth rates (available from some data sources).
Company revenue, EBITDA and growth rates can have significant impact on the EBITDA multiple applied and ultimately the valuation. All things being equal, a 10MM top line with 2MM EBITDA will have a very different multiple applied to it than a 20MM with 4MM, or a 5MM with 1MM (although the EBITDA margin is the same, the larger company might have a 8X multiple while the smaller business a 5X multiple (e.g, 32MM valuation for the biggest guy and 5MM for the smallest although the bigger firm is only 4 times larger, they get 6.4 times the valuation).
We tend to use a discounted cash flow model to evaluate different businesses. Long term contracted client engagements along with repeat clients will up the value as you would suspect.
Ultimately, the true test is to have the business on the market and see what the market is willing to pay. Probably not practical but certainly the best measure. As a proxy, you can talk to some of the best investment bankers that handle your vertical and get a sense of what they understand the range of valuation... Good luck

I'm in a similar service business. I'm using 3 times the average annual adjusted profit for the last three years. That's because I think a buyer would want to see a 33% annual return on his investment. If I thought 20% would attract a buyer, then I would price it at 5 times the average annual adjusted profit. This is based on advice from my CPA and he does have some valuation experience.

Thank you Francine, Glenn and Andy. Francine, I will call you directly.

The interesting part is that there are conflicting opinions on 3X versus 5X to 8X as a multiplier. Market data is also mixed. One thing I seem to have noticed is that in larger metropolitan areas, multipliers seem to be larger (I could not tell you the reason why) -- maybe it is just a bigger pool of prospective buyers....

Of course any asset is worth what the market says it is -- and therefore the true acid test is the market response -- however I am interested in understanding the theoretical formulas that Francine refers to.