Valuing a business internationally

Even if you reside in the USA or Canada, your business valuation projects may require that you value a business outside of North America. One question is whether the valuation approaches and methods are affected by where the business is located.

The short answer is that it does not matter where the business is currently located. As long as you use professionally accepted business valuation methods, you can value a company in the same way regardless of where it is currently based.

This is in sharp contrast to the real estate appraisal. Where a property is located can make a major difference to such key valuation parameters as the capitalization rates. The reason is that a real property cannot be separated from its geographic location.

Businesses can locate operations anywhere

Business differ from real property in a number of important ways. First, businesses can easily relocate operations to a different geography. In addition, as companies grow they tend to create presence in a number of locations.

What this means is that business location is seen as a value factor to the extent that it allows the company to reach its intended market. In this sense the business competes for desirable locations much the same as it does for capital, skilled workforce, a seasoned management team, favorable distribution and supplier agreements. Location preference is not a factor that affects business value in and of itself.

Same business valuation methods apply

Hence you can use the same business valuation methods to value a business located anywhere. Such methods as the multiple of discretionary earnings, let you account for the business location as one of the key value creating factors. But the actual geography of the business operations is not at issue here. What matters is how valuable the location is in helping the company achieve its financial goals.

In this sense a location in, say, Perth Australia may be more valuable to a company than a site in downtown New York even if the owners prefer New York for personal reasons. If you are valuing an international operation with many sites across the world, then each location is assumed to contribute to the company’s financial performance. So you focus on valuing the firm based on its earning power and risk assessment instead of the geographic location of its operations.

This comes out very clearly when you look at how the discount and capitalization rates are calculated using the build-up model. Note the conspicuous absence of location in the elements that make up the discount rate. What counts for the investors is how well the company does financially.

In other words, the investors assume that management has chosen the right locations to maximize the returns for the shareholders. Beyond this the investors do not expect additional returns just because the company has selected a specific geography to establish its presence.

Business sale multiples

If you are preparing for a business sale or considering investing in an existing business the central question is: how much is the business worth?

One of the most useful approaches to answer this question is to look at the current selling prices of similar businesses. Once you gather enough information on what these businesses sell for, you can come up with a good idea of what your company selling price is likely to be.

To calculate the actual business market value figure, you would need to relate the selling prices you get from the market to the companies’ financial performance metrics. This gives you a set of business sale multiples such as

• Business sale price to net income
• Business sale price to EBITDA or EBIT
• Business sale price to gross revenues or net sales
• Business sale price to its cash flow, e.g. net cash flow or discretionary cash flow
• Business sale price to total assets

With these valuation multiples ready, you can calculate what your company is worth. For example, take your company’s most recent annual revenue and multiply it by the business sale price to gross revenue multiple. The result is the estimate of what your company’s market value is currently.

As the market conditions change, you will notice that the multiples you get change as well. That is why it is important to gather the recent business sales data. These transactions capture the current sentiment in the market place about how valuable the businesses offered for sale are.

No two businesses are the same, so your estimate of business value is an educated guess. It provides you with a number or a range of values where your company’s worth is likely to fall. Unique attributes that set a particular business apart from its peers in the industry may make the business more or less valuable in the eyes of investors. Hence, you can argue for a higher or lower valuation based on your knowledge of the business itself.

Alternatively, you can use other valuation methods that let you determine the value of a business based its income or asset base. These types of methods do not require a comparison to other companies. Instead, you calculate business value by directly analyzing your business.

Doing such calculations alongside your market comparisons is a good way to justify your results based on the business sale multiples.