Bridging the Valuation Gap

With many companies rebounding from challenging economic conditions, we’ve seen a valuation divide between buyers and sellers in today’s market.  Buyers, as always, are primarily concerned with historical financial performance while sellers describe the last few years as aberrations.  Sellers would rather focus on projections of the profit potential that will be unleashed once the economy improves, and may even point to recent good months or quarters as evidence.  Buyers are reluctant to believe projections, hence the divide.

A solution to this, and one that we’re seeing more and more buyers willing to accept, is to use Trailing Twelve Months (TTM) financial data to arrive at a valuation.  Much different from the most common method, a 3-year weighted average of fiscal year ending financial data, TTM accomplishes three things: (1) By using the last twelve months of financial data rather than the last completed fiscal year, it provides a more accurate picture of what the company is doing today and the direction it may be tracking;  (2) Years or months that may have been aberrations, if they occurred long enough ago, are disregarded and don’t affect the valuation; and (3) By only using actual results, a seller doesn’t have to make and a buyer doesn’t have to believe in projections.

This doesn’t mean that projections or growth potential aren’t important – those factors can to an extent influence multiples which buyers are willing to pay.  However, when a company is in transition with an improvement in financial performance, it is helpful to look for unique and viable solutions to get deals done.

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We’re in the process of writing an article on this subject and would appreciate feedback from the “Deal Community”.  Please let us know your thoughts or experience with TTM valuation, especially from the Business Owner, Banker or Buyer perspective.  Simply leave a comment below or contact us here – we welcome your input and appreciate hearing from you.