Valuing the Business: Some Difficult Issues

Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate. Here are some issues that must be considered when arriving at a value for the business: Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms. Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue. Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value. Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption. ESOP Ownership – A … [Read more...]

Considering Selling? Some Important Questions

Some years ago, when Ted Kennedy was running for president of the United States, a commentator asked him why he wanted to be president. Senator Kennedy stumbled through his answer, almost ending his presidential run. Business owners, when asked questions by potential buyers, need to be prepared to provide forthright answers without stumbling. Here are three questions that potential buyers will ask: Why do you want to sell the business? What should a new owner do to grow the business? What makes this company different from its competitors? Then, there are two questions that sellers must ask themselves: What is your bottom-line price after taxes and closing costs? What are the best terms you are willing to offer and then accept? You need to be able to answer the questions a prospective buyer will ask without any “puffing” or coming across as overly anxious. In answering the questions you must ask yourself, remember that complete honesty is the only policy. The best way to prepare … [Read more...]

Is Your “Normalized” P&L Statement Normal?

Normalized Financial Statements – Statements that have been adjusted for items not representative of the current status of the business. Normalizing statements could include such adjustments as a non-recurring event, such as attorney fees expended in litigation. Another non-recurring event might be a plant closing or adjustments of abnormal depreciation. Sometimes, owner's compensation and benefits need to be restated to reflect a competitive market value. Privately held companies, when tax time comes around, want to show as little profit as possible. However, when it comes time to borrow money or sell the business, they want to show just the opposite. Lenders and prospective acquirers want to see a strong bottom line. The best way to do this is to normalize, or recast, the profit and loss statement. The figures added back to the profit and loss statement are usually termed “add backs.” They are adjustments added back to the statement to increase the profit of the company. For example, … [Read more...]

Do You Have an Exit Plan?

“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.” From: Selling Your Business by Russ Robb, published by Adams Media Corporation Whether you plan to sell... … [Read more...]

The Devil May Be in the Details

When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable. In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. For example, the Reps and Warranties may kill the deal. Other areas such as employment contracts, non-compete … [Read more...]

Family Businesses

A recent study revealed that only about 28 percent of family businesses have developed a succession plan. Here are a few tips for family-owned businesses to ponder when considering selling the business: You may have to consider a lower price if maintaining jobs for family members is important. Make sure that your legal and accounting representatives have “deal” experience. Too many times, the outside advisers have been with the business since the beginning and just are not “deal” savvy. Keep in mind that family members who stay with the buyer(s) will most likely have to answer to new management, an outside board of directors and/or outside investors. All family members involved either as employees and/or investors in the business must be in agreement regarding the sale of the company. They must also be in agreement about price and terms of the sale. Confidentiality in the sale of a family business is a must. Meetings should be held off-site and selling documentation kept off-site, if … [Read more...]

Two Similar Companies ~ Big Difference in Value

Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What's the difference? One can look at the usual checklist for the answer, such as: The Market Management/Employees Uniqueness/Proprietary Systems/Controls Revenue Size Profitability Regional/Global Distribution Capital Equipment Requirements Intangibles (brand/patents/etc.) Growth Rate There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example: Are the company's … [Read more...]

What Are Buyers Looking for in a Company?

It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price. Quality of the Earnings Some accountants and intermediaries are very aggressive... … [Read more...]

A Reasonable Price for Private Companies

Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their... … [Read more...]

Top Ten Mistakes Made By Sellers

Neglecting the day-to-day running of their business with the reasoning that it will sell tomorrow. Starting off with too high a price with the assumption the price can always be reduced. Assuming that confidentiality is a given. Failing to plan ahead to sell / deciding to sell impulsively. Expecting that the buyers will only want to see last year's P&L. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time. Not accepting that the structure of the deal is as important as the price. Trying to win every point of contention. Dragging out the deal and not accepting that time is of the essence. © Copyright 2015 Business Brokerage Press, Inc. Photo Credit: jppi via morgueFile … [Read more...]