What’s a Fair Price for Your Company?

BY STEVE DINNEN

A quick glance through businesses for sale in Iowa shows scores available, ranging from a plumbing contractor to a motor sports company to several manufacturers (and many restaurants). You may be interested. But they’re asking as much as $15 million, raising the question: Are they worth it?

Selling or buying a company may not be so hard. It likely will be more difficult to settle on a price. Yes, there is a formula, which looks to be pretty basic: Value = income over risk-growth. But how do you place a value on risk? How do you value growth?

For help in these matters we turned to James Nalley and Tom Cavanagh, vice presidents at BCC Advisers in Des Moines. Their firm specializes in arranging business acquisitions and determining the value so that you can maximize your profits as a seller, or minimize your expense as a buyer.

There are three basic approaches to valuing a company, said Nalley:

  • Asset-based. This looks at the assets of a business, minus liabilities. This works best for businesses that are capital or tangible asset intensive. It can be used for real estate holding companies, and industries such as farming.
  • Income. Best used for operating companies, this looks at the capacity of the business to generate cash flow. You want to be able to determine what will happen in the future, and apply it to the past.
  • Market. This approach considers methods that use the relationship between stock prices of public companies and their earnings and book value.


There are countless variables to consider, such as the overall health of the industry being considered, skills of staffers, modernity of equipment used, etc. Luckily, there are guidelines that come from reams of research that companies compile on business transactions, and Nalley goes through them to look for help. A metals fabricator, for instance, in general will have to pay so much for his stock, and can sell it to only so many clients. But does he have a delivery advantage, or new processing equipment (or outdated), or good workers with high productivity? Does technological innovation play a role for better or worse? Are their key employees whose skills will be missed, or needed?

It gets complicated. But it’s worth the effort, as Nalley said he recently worked with one client who missed a technology change that made his business worth much more than the asking price.

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