Ask a room of CEOs what their companies are worth.
Some will have a good idea. Some will not. Most will name a multiple they heard somewhere. Six times earnings. Maybe 10. Ask where the number came from, and the room goes quiet.
If you underestimate, you might not sell when you should, or you might accept too little when you do. If you overestimate, you waste time, money and energy on an embarrassing and disappointing lesson you could have avoided. That is a bad feeling.
Best and Final is a free, interactive and anonymous quiz to test your valuation chops. This month’s game focuses on steel.
We created two hypothetical steel companies in each of five industry segments, using composites based on real transaction data from PitchBook, GF Data and other reputable sources. We will cover other industries in our series. Let us know if you have one you would like to see.
Steel edition: https://bestandfinal-steel.netlify.app
Two easy mistakes to avoid: not adjusting for size and treating your industry as one market when buyers see several.
The word steel describes at least five different businesses based on value added to a commodity. A structural fabricator bids projects and competes on price and schedule. A service center buys, holds and sells inventory. A toll processor runs someone else’s metal through its line for a fee. A precision shop holds tight tolerances. A certified shop, qualified into a defense program, has passed audits that took years to clear.
Same raw input, five business models. Different results.
The key variable is the value added to the commodity. A fabricator bidding open projects can be swapped out next quarter by whoever bids lower. A shop written into a defense specification cannot be replaced without a requalification that costs the customer months and money it does not want to spend. One of those companies has pricing power, and the other has a bid list.
How concentrated are your customers? Are certifications transferable to a new owner, or do they walk out the door with the founder? Are contracts assignable? Is your backlog contracted work or a hopeful pipeline? Steel earnings in particular swing hard with the cycle, so a peak-year multiple applied to unadjusted earnings tells you almost nothing.
Do not believe what you hear. Develop your own view and test it.
These questions highlight why the issue travels beyond steel. Ask them about your own business. If a customer wanted to leave tomorrow, what would it truly cost? If the honest answer is a phone call, you are closer to the commodity than you think.
Comparable transactions for valuations are a starting point, not a destination. Private market data is often proprietary, and public company data is irrelevant to a privately held one. Why this multiple? Why that adjustment? The final answer lies in specifics and individual judgments that fluctuate with the market. Staying current through confidential discussions can help you develop and maintain your own view. It is a real advantage when you decide to buy, sell or raise money.
You adjust a valuation baseline based on answers to diligence questions. If you do not bid enough, you do not make it to the second round. If you overpay, you win, but it is a Pyrrhic victory. It is anonymous and takes about 10 minutes.
Other quizzes include a readiness evaluation and a game to see what you think you can sell your company for. More are coming. They can be useful tools if you test them.
We regularly brief CEOs on these issues whether or not they are considering transactions. We keep those conversations private. We would be glad to do the same with you.
