With the recent spate of merger and acquisition activity in the technology integration market, many business owners are beginning to think about their future, the future of their business, and what exit options may exist for them. [related]
Given that nearly 60 percent of business owners are planning on transferring their ownership interests within the next 10 years, it is critical to know how to assess the value of your integration business before beginning the process.
While there are several academic/theoretical ways to calculate business value (i.e. discounted cash flow, public comparables, transaction comparables, etc.), these methods do not consider the many qualitative factors that can really drive business value to the upper end of a valuation range.
These factors include:
- Scale — Larger tech businesses are viewed as more diverse, less risky and therefore carry higher valuation multiples.
- Industry — Industries that have size, perceived health and robust growth prospects generally see higher valuation multiples.
- Growth — Business that have demonstrated a track record of higher growth are generally viewed as more valuable.
- Management — Businesses with successful and experienced leadership teams receive higher valuations than those with weaker management.
The specifics of your tech business can really impact its value.
It’s important for you to understand the value that a buyer or investor will see in your company. Does your business represent the missing link in a buyer’s strategic plan? If the purchaser is strategic, then you need to know how your pro AV business will impact the value of their business to obtain the highest valuation.
Don’t assume that an industry average multiple is the right valuation metric for your business.
This is particularly poignant for integration companies. The marketplace places different value on cash flows associated with project-oriented businesses than those that result from recurring revenue streams (such as managed services).
Integrators whose systems integration business is a hybrid should take that into account, particularly when allocating investment dollars to their business.
And finally, never underestimate the power of competition.
A competitive sell-side process can drive buyers to bid against each other to reach valuations unsupported by any model. The bottom line is that there is no straight forward answer to the question of “What is my technology business worth?”
Business value is driven by a combination of financial models, qualitative factors, and, in many instances the personal emotions that can drive one buyer to pay more than another.
A good investment banker will position the acquisition opportunity in the most favorable light to potential buyers and create a competitive environment to drive buyers to be as aggressive as possible.
