4 ways to determine the value of your food or beverage business

Most entrepreneurs investigate the value of their business when it’s time to sell or change structure. But what about the rest of the time? Knowing the value of your food or beverage processing business and its future earning potential is always a good idea.

Determining the true value of your business comes from a process called valuation, a deep dive that brings together data from various parts of your business.

Andrew Heintzman, the managing partner at Invesco Capital, says in addition to selling the business, a food or beverage processor may do valuation when someone is buying a portion of the business, options are being issued to employees, mergers or acquisitions are on the horizon or when funding is needed.

Determining value involves a combination of potential and current markets, earning possibilities, and the value of similar businesses. Since potential and possibilities are subjective, Heintzman says combining multiple data points helps focus the value.

“Your company is worth the discounted future of all the cashflows – all that future money in today’s value,” Heintzman says. “This exercise tries to specify that and arrive at a number. You want multiple data points.”

There are various ways to gather data and determine a valuation. Some include using models like absolute valuation, which is the discounted cash flow (DCF) Heintzman refers to. In DCF, the value is based on using a model to determine how many years of future cash flow to include, then applying a rate to discount the money to today’s value.

Relative valuation, which is also effective, considers sales or assessments of similar companies and general market value.

Heintzman says that blending absolute and relative valuation can help provide more in-depth and accurate results.

Valuation can be a complex process. Heintzman has four key recommendations to start on the path of determining the value of your food and beverage processing business:

1. Bring in help

When we pour our heart and soul into our business, it’s easy to overvalue its worth. Business experts and consultants can help provide perspective and a reality check. Your business advisor, financial advisor or banker, bookkeeper, accountant, realtor investors and others within the industry can be key contributors to the valuation process.

2. Lean on existing business relationships

While Heintzman considers DCM the benchmark of valuations, he recommends starting the process by asking current business advisors if they have a standard practice for valuation. Look at similar, but public, companies and discounts for size differences. If available, private deals are even better, and he recommends looking at a Pitchbook, a database of private deals. While it comes with a fee after the initial free trial, Heintzman says the database shows what companies have sold for and money raised at certain milestones. It’s a great way to find similar businesses and gauge future potential selling values.

3. Set your goal

Why are you doing valuation? How will the information be used? The answers determine how much data you’ll gather and how far back to go. Ask your financial advisor about expectations for a loan from a financial institution. Similarly, going public would have a different set of expectations.

“The ultimate test is what the actual market tells you about your valuation,” Heintzman says. “If you’re going to do that, ensure you’re doing the full process.”

Those numerous data points support what you propose as your business's value. It’s essential to show potential investors how that value was reached. However, no matter what the value can be narrowed to with data if an investor won’t consider that amount, the value is irrelevant. Just as multiple data points round out the value picture, so too do multiple investors who state what they are willing to pay.

4. Be patient

Diving into the data and information required to create a picture of your food and beverage business’s worth takes time. Expect the process to run from six months to a year or possibly longer.

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