What is Market Value?

What is market value? 

Simply put, market value is the cash flow from a business multiplied by a cash flow multiple that buyers come up with based on a number of business factors. What are the things that increase the multiple? 

  • How fast the company is growing
  • How strong the margins are
  • How definitive the market position is
  • How strong the management team is
  • How good are the numbers are
  • How recurring the revenue is
  • What little concentration of revenue a company has

These are all factors, and there are certainly others too, that buyers and investment bankers consider when coming up with the value as they look at a company and say it's worth X. 

Part of our assignment at JKMA is to always try to increase the value by furthering the cause in any one of these key characteristics. For example, how can you grow faster? There's a direct correlation between fast growth and market value. How can you have better margins? There's a direct correlation between better margins and market value. Can you have faster growth and better margins? Yes, it's called scale or operating leverage. The companies that have it demand the best prices in the market today because they can grow revenue and increase margins faster. 

For instance, the house next door to you is probably worth more to you rather than someone else because you can combine it to create a double lot. The same can be said about business. How does a company fit with a particular buyer? In some cases a particular buyer will pay more because they can do more with a business by adding it to their current business. 

How do you analyze that? You take a look at what the buyer offers and what you offer to see if that 2 + 2 = 6.  That's the nirvana of selling your business - trying to find a situation where 2 + 2 = 7, 8, 9 or 10.