Bankers don’t just rely on the valuation of business appraisers to determine the value of your business: They rely on each other. Find out how they use pooled data from the RMA to determine what your business is really worth.
Beauty is in the eye of the beholder, but the value of your business is in the hands of the bankers. Whether you’re seeking approval of an M&A or looking to borrow money to build your business, a bank’s decision will be based on their determination of your company’s value.
How is that value determined? Bankers take many factors into account, but the primary tool for determining the valuation of privately held companies is a dataset produced by the RMA. And it includes information that is absolutely critical for you to understand.
What Does RMA Stand For?
RMA stands for the Risk Management Association. It is a not-for-profit member-driven association that serves the financial industry. Their sole purpose, as noted on their website, is “to advance the use of sound risk management principles in the financial services industry.”
Risk Management Association
(An interesting note about their name: RMA was originally called the Robert Morris Associates, named after Robert Morris, a principal financier of the Revolutionary War who helped establish our country’s banking system.)
According to Dave Miles of ValuSource, RMA has created a dataset that bankers use to establish the value of your business. “The question that keeps a banker up at night is ‘Am I going to get paid back?’” Miles said. RMA helps uncover the answer.
Bonus Content: Check out this audio interview with Dave Miles for more info on why RMA appeals to lenders, and how you can use it to improve your company.
How Can the Risk Management Association Pool Your Information?
Remember, RMA is an association of financial institutions. To answer the question, “Am I going to get paid back?” they’ve created a dataset that helps mitigate risk by helping them establish the probability of repayment and hence the value of a company.
In a nutshell, here’s how it works: RMA members will pool data on any business that has applied for financing. They don’t include personal data -- just the financials of the company. The data is aggregated and summarized, and allows financial institutions to compare similar, both in size and industry, businesses. This comparison establishes strengths and weaknesses of the business being analyzed.
This is essential when you’re comparing smaller, privately-held businesses that don’t need to make their financials public. You see how other companies in the same industry and of the same size are performing. “It’s hard to find a better dataset,” Miles said.
One Piece of the Puzzle: Other Datasets Included in the Mix
Miles notes that “every dataset has its strengths and weaknesses,” and that RMA is one of many tools (others include Bizcomps and IBA Market Data) used by lenders to evaluate your business.
His company, ValuSource, is a software provider that aggregates the various datasets like RMA, BIZCOMPS and IBA Market Data, and provides lenders and independent consultants access to the critical information.
In many of the deals the LaManna Alliance has been involved in, RMA forms the crux of a lender’s decision for small and mid-sized privately held businesses. There simply is no other way to access a private business owner’s financials.
So while a variety of other factors will affect pricing (I’ll get to that in a bit), RMA is the starting point -- and for some deals, the end point.
How to Use RMA Data to Sell (or Build) a Business
The RMA dataset can be used to improve how your company looks on paper in the short term, or provide the blueprint for making long-term changes that will ensure you’re competitive with the marketplace.
Short-term changes. Miles refers to these as “window dressing.” These are small changes you can make in 6 months or a year that can change how you’re viewed through RMA.
For example, you can tighten up your Accounts Receivable and Inventory Control so you have a better working capital scenario. This would make the value of your company go up or at least be more attractive to a buyer.
Long-term changes. You can dig a little deeper and use a DuPont analysis to see how a company is making money. If it’s a top competitor, are you making money through gross margin? Off volume? By leverage?
This video describes a DuPont Analysis, which is one of the schedules offered in the ValuSource software:
RMA Provides the “Generic” Investor Perspective
Many times, deals go south when business owners refuse to accept the values decreed by the marketplace. It’s a classic case of not putting yourself in the shoes of the potential buyer. In this case, Miles refers to the “generic” investor.
The “generic” investor doesn’t look at your business the way you do. They are looking at you strictly as an investment. They go to a broker and ask what businesses are for sale? Then they judge which would be a better deal, which has lower risk, and how likely they are to get a return on their investment.
“They are just investing in the marketplace,” Miles said. “They want to know what their return will be.” RMA gives them that perspective, and unless you adapt to its findings, you’re going to be missing out on a lot of investors.
Finding the “Synergistic Value”
The only way to escape the reality that is RMA is to find an investor that needs you for competitive reasons. Perhaps they want to consolidate the marketplace, or expand their reach geographically. Miles refers to this as “synergistic value.”
In these cases, your chances of beating the types of value indicated by RMA datasets is more likely. But this comes back to your capabilities and your potential in the marketplace: Now you’re selling vision and a promise of the future, and that’s not an easy sell.
I find there are two types of business owners who sell: Those who believe what the market is telling them, and those who like to stick their head in the sand.
When you use the RMA dataset, you have a window to the marketplace, and you’re seeing your company like an investor. It also helps you make the short and long-term changes that will ultimately produce the highest value for a buyer, and the best price for you.