Middle Market M & A, 2nd Edition

CHAPTER 3Valuation Perspectives for the Private Markets

“How much is my company worth?” is the first question any potential seller asks. The often‐frustrating answer is “It depends.” The value of a business depends on market and industry trends, the availability and cost of capital, and the underlying soundness and future prospects of the business—its intrinsic worth, or essentially, a prophesy of the expected future operating cash flows of the company. But it also depends greatly on who is buying. Just as in an auction the same painting is subjectively worth more to the winning bidder than to any of the others, so the price a business will fetch varies depending on who the buyer is and what they can do with it.

Chapter 2 outlined the differences in the private capital markets and traditional corporate finance theory with a focus on laying the foundation for understanding middle market M&A, particularly for privately or closely held businesses. This chapter continues that theme by providing a high‐level overview of valuation and how to frame the valuation analysis in the context of doing deals; it describes the fundamental concepts underlying private business valuation. Keep in mind that valuing a business is a blend of art and science, with a reasonable level of subjectivity and common sense.

Business valuation is an attempt to estimate the balance between risk and return in acquiring a business—or, put another way, between the return opportunity an acquisition represents ...