Due to the level of interest in the Indicators of Value, we have tried to develop a template that agency owners could use to estimate the value of their agency. We believe that we could come up with a process that would provide a reasonable range of value in today’s market. The problem is simple. Valuation is not determined by a firm such as Sukay & Associates. In an Internal Perpetuation, value is determined by the owner of the shares and that value must be agreed upon by the new shareholder.
How is Value Determined in a Third Party Sale?
A third party sales valuation is more complex. In a third party sale, we could seek proposals from several parties. The valuation might be significantly different between the parties. Does this make the higher valuation correct and the lower valuation unreasonable? Each proposal reflects the interest of the buyer. We often hear the term, “Disciplined Buyer.” What does this mean? It doesn’t mean that the buyer won’t pay a fair price. It doesn’t mean that they don’t expect to be the highest bidder. It usually means that they have a very formal process that it used to evaluate an agency and that their price usually falls within a given range.
Value is determined by the product of the cash flow of the agency (“EBITDA”) times a valuation multiple. Agency owners often focus on the valuation multiple. We suggest that you focus on the EBITDA. The cash flow of the company is always subject to numerous adjustments. It would seem as though the EBITDA would be the same for every buyer. The reality is that it is different for every buyer. It is the job of Sukay & Associates to understand these differences in order to evaluate the proposals of each buyer. Internal perpetuations are no different. As an example, should the owner compensation be included in the valuation of the agency? In some agencies, it clearly should be included and in other agencies in should clearly be excluded.
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If you plan on selling a single share of your company’s stock to anyone, you need to know the value of your agency. We can’t tell exactly what a third party might be willing to pay. We can’t tell you what someone within the company might be willing to pay. We are able to give you our estimate of the fair value of the company.
If you don’t plan on selling any of the shares of your company, you don’t need a consultation. However, eventually, you will need to do something. Most owners sell shares to key employees or family members. If so, you need to have those shares valued. Unfortunately, we see many examples of internal perpetuations where the stock that has been improperly valued. In fact, it is extremely rare for us to be involved in a situation where we believe the shares were properly valued.
We would be happy to speak with you about your plans, either an Internal or External Perpetuation. We have never conducted a phone call of this type where the client hasn’t asked one question, “What do you charge for your services?” Our answer is always the same. We do not charge unless we think we can help. If we agree on a plan, we will then agree on a fee. Please feel free to give us a call to discuss your plans. Everyone has an interesting story and everyone has a unique circumstance. We love interesting situations and interesting people. The process begins with a discussion about your agency and your goals.
