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...]
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...]
Three Basic Factors of Earnings
Two businesses for sale could report the same numeric value for “earnings” and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number. 1. Quality of earnings Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately reflect the true earning power of the company’s operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items. 2. Sustainability of earnings after the acquisition The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous rate. 3. … [Read more...]
What is the Value of Your Business? It All Depends.
The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered. Does an owner need to know for estate purposes? Does the bank want to know for lending purposes? Is the owner entertaining bringing in a partner or partners? Is the owner thinking of selling? Is a divorce or partnership dispute occurring? Is a valuation needed for a buy-sell agreement? There are many other reasons why knowing the value of the business may be important. Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, if a … [Read more...]
Strategies for Maximizing Market Dominance: Key Steps to Boosting Business Value
At some point, you will need to sell your business. When the time comes to put your business on the market, it is in your best interest if your business has a dominant position in the market. Potential buyers will be far less excited about your business if you are playing catch-up to one or more competitors. In the end, maintaining a dominant market position will help you receive both maximum interest and top dollar for your business. Take Steps in Advance Preparing your business to be sold isn’t something that you do overnight. Instead, preparing your business for sale is a process that can take years of meticulous planning. Operating your business as though you will need to sell it soon is always a smart strategy. Boost Your Customer Base A key part of maintaining a dominant position in your market is to have a large number of customers. The logic is simple: if you have a large number of customers, then it only makes sense that your competitors have fewer customers. A prospective … [Read more...]
The Emotional Side of Selling Your Business
It is easy to get lost in the numbers when it comes to selling your business, but it is important to remember that the numbers only tell one side of the story. Both buying and selling a business come with significant mental and emotional ramifications. Why is this so critical to understand? Sellers who are not emotionally ready might subconsciously take steps to interfere with the sales process. Typically, sellers have invested a great deal of time and effort into their business, and as a result, they may simply not be truly ready to sell. Before the day comes to put your business up for sale, pause and reflect on whether you are 100% onboard. Let’s take a look at some of the questions to ask yourself so that you can decide if you are truly ready to sell. Do You Have Future Plans? Topping the list of emotional factors that you need to consider when selling are your plans for the future. If you don’t know what your plans are for after selling your business, you may encounter … [Read more...]
Why Should You Buy an Established Business?
A pre-existing business is a proven commodity. A new business, regardless of how great your idea may be, will always have a future that is uncertain. You can hire many consultants and plan meticulously. Yet, even with the best ideas and most experienced consultants, your newly minted business could still quickly fail. A business with a long track record of success provides you with a degree of security and certainty. It’s also important to note that an existing business has a myriad of established relationships, which are invaluable. Business is all about cultivating strong relationships and developing a positive reputation. An established business will have those relationships set up and ready to go. This can be tremendously beneficial and save you a lot of time and energy. Whether it is suppliers, customers or key employees and management, this track record can help ensure your success. It will bring with it long-term customers, as well as an established and proven supply chain. … [Read more...]
What Should You Expect from Your Business Intermediary?
Eventually every business owner needs to sell or think about who will take over their business when they retire. Working with an intermediary is an easy and streamlined way to jumpstart the process and learn what mistakes to avoid. A business broker or M&A advisor can help you to understand what steps to take to achieve optimal results. Teamwork Makes the Dream Work First, it is simply critical to understand that selling a business is a team effort. No seller should begin working with an intermediary with the idea that the intermediary will do “all the work.” The reality is that in order to achieve a successful sale, it is necessary for the seller and the intermediary to work closely and engage in a good deal of communication. Other key people such as executives and advisors will also have to work closely with your business broker or M&A advisor. Without a doubt, selling a business is a group effort that will need cooperation from many parties. For example, you’ll also need … [Read more...]
How to Save a Deal
Few business owners truly understand the complex dynamics of making a deal. Having never participated in selling a business before, the majority of business owners are blissfully unaware of what it takes to turn the dream of selling a business into a reality. Having a brokerage professional by their side is an easy way for a business owner to avoid the dangers that can easily torpedo a deal. Keep Your Eye on the Ball One of the most common reasons that businesses will fail to sell is that the business owner becomes obsessed with the pending transaction, and in the process, fails to keep up with the day-to-day operations of the business. The sales process can take months, or even years, and that means that the owner needs to pay attention to every aspect of their business or a prospective buyer could become very concerned. Keep Confidentiality a Top Priority Another mistake that business owners can make, one that will quickly kill a deal, is a breach of confidentiality. If the sales … [Read more...]
How to Optimize Your Chances of Selling Your Business
The simple fact is that selling your business is likely to be the single most important financial decision you’ll ever make. With this important fact in mind, it is essential that you prepare far in advance. Let’s dive in and take a look at some of the key items you’ll want to check off your list before placing your business on the market. Think About Legalities When it comes to selling a business, legal issues should be at the forefront of your thoughts; after all, selling your business does involve the creation and execution of a complex and detailed legal agreement. There are many times in life where it is possible to cut corners, but hiring a good lawyer or law firm is not one of those times. Moreover, you’ll want to settle all litigation, environmental issues or other issues that could potentially derail a sale. Deal with Serious Buyers Working with a good business broker or M&A advisor is an essential part of the selling process, as these professionals will help you to … [Read more...]