I'm starting this 3-part series because of yesterday's discussions.

I'm helping a friend sell his business, as in 100% of the equity. This is going to be a full exit.

You can sell a business in two ways:

• Private Equity Full Buyout - when a fund is strictly interested in financials or wants to build a strong portfolio
• Strategic Buyout - when another business wants to integrate your business in their own

Both ways imply a judgement on how much your business is worth. Buying and selling businesses is an entire industry and, of course, that means that there is a whole business sector in mediating these deals.

Yesterday I had contact with one specific part of this business sector: business brokers. As is the case with all industries, you can have good business brokers or bad business brokers. The easiest way to spot good brokers from bad brokers is if they ask "How did you do the valuation? What did you use?". Good brokers know math. Bad brokers only know arbitrage.

The value of a business can be determined by:

1. market value, including market approach, income approach and cost approach
2. multiple on EBITDA (revenue-expenses), evaluating the current business health and the growth potential of its sector
3. DCF (discounted cash flow), because a dollar today is worth more than a dollar in the future

A proper company valuation should use all three and stress-test them against each other. However one is more appropriate than the other according to what stage the company is at. For this we look at the conventional corporate lifecycle.

Here is a little snippet from my book, The Informed Exit:​

Startups raise funds the same way companies get sold - via equity. We need to put a price tag on that equity before asking for money. Pre-seed startups don't really have an EBITDA to apply a multiple on. At the same time, mature / late mezzanine businesses don't really have DCF or WACC (weighted average capital cost) because that particular business model has plateaued.

All valuation methodologies are imprecise. Nobody can predict the future, especially when the company leadership changes. But if you do a really good job when using these 3 methods, you'll notice that you end up with roughly the same price tag on a business. I think that is a beautiful thing.

We use all three because we need to distinguish the difference between a car wash and high-end luxury F&B chain. Bad business brokers do not see a difference between those two. Good brokers will. Even if their EBITDA is identical, their multiple won't be the same. Neither will their WACCs.

My friend who is exiting built something great over the course of 12 years. Competitors try to copy it and they go bankrupt in the process. This is why bad brokers should not be tolerated.

See you next time for Part 2.