The trickiest part about establishing values in the label and converting industry is that it’s not entirely homogenous. Different industries produce different multiples, and are subject to a dizzying number of variables.
Banks rely on RMA data and other financial datasets to ensure they’re comparing apples to apples with companies. Nevertheless, business values will differ. No two companies are the same. That’s why different methods are used.
Two Primary Methods
Let’s take a look at two different valuation methods, as explained by Paul Reilly of New Directions Partners.
1. Asset-based market valuation: In this method, you consider the underlying assets of the capital. This includes your net working capital, production equipment and the value of your customer base.
2. EBITDA multiple valuation: In the second method, you compute your company’s EBITDA, and then multiply it by the EBITDA multiple for the industry. Many financial experts consider the overall multiple for the printing industry to be four, but the range can increase for specialized niches.
These two valuation methods are not the end point, however. There are a wide range of factors that also need to be considered. Here are a few examples:
Above-average operating margins. If you have higher margins than the rest of your industry, that is an indication to a buyer that you’re a well-run company. Processes are critical as a company looks to scale up, and this is a good indication that you’re doing things better than the other guy.
Concentration of customers. Ideally, your sales concentration should not be more than 30% on one customer, or rely heavily on a small handful of salespeople. How diversified are you? If you’re one lost contract away from significant revenue reductions, that’s a big red flag.
Guaranteed long-term contracts. Some of the experts believe none of the aforementioned items matter much -- it’s yesterday’s news. What do you have in store for the future? More importantly, what do you have guaranteed, under contract, for the long-term?
Potential, Potential, Potential
At the end of the day, it’s not really about what the value of your company is worth today. It’s what it will be worth in the future.
You may take pride in the hard work taken to grow your company, but to an investor who flips through hundreds of deals a year, it doesn’t make any difference. How are you poised for the future? What is your vision, and is it worth an investor’s time?
The valuation you want is dependent on the vision you can sell and potential you can prove. And that’s something you can definitely take to the bank.
Click here to learn more about business valuations, including a special offer to see how you can find out what your business is really worth.
Rock LaManna is the author of L&NW's popular The Bottom Line column. Rock helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. He is President and CEO of the LaManna Alliance, and provides guidance on how to grow a printing business, merge with a synergistic partner, make a strategic acquisition, or create a succession plan. Rock can be reached by email at Rock@RockLaManna.com.