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Difficult Issues Often Attached to Valuing a Business

There is little doubt that valuing a business is often a very complex process.  In part, this complexity is due to the fact that business evaluation is somewhat subjective. The simple fact is that the value of a business is often left to the mercy of the person conducting the evaluation.  Adding yet another level of complexity is the fact that the person conducting the valuation has no choice but to assume that all the information provided is, in fact, correct and accurate.

In this article, we will explore six key issues that must be considered when determining the value of a business.  As you will see, determining the value of a business involves taking in several factors.

Factor #1 – Intangible Assets

Intangible assets can make determining the value of a business quite tricky. Intellectual property ranging from patents to trademarks and copyrights can impact the value of a business. These intangible assets are notoriously difficult to value.

Factor #2 – Product Diversity

One of the truisms of valuing a business is that businesses with only one product or service are at much greater risk than a business that has multiple products or services. Product or service diversity will play a role in most valuations.

Factor #3 – ESOP Ownership

A company that is owned by its employees can present evaluators with a real challenge. Whether partially or completely owned by employees, this situation can restrict marketability and in turn impact value.

Factor #4 – Critical Supply Sources

If a business is particularly vulnerable to supply disruptions, for example, using a single supplier in order to achieve a low-cost competitive advance, then expect the evaluator to take notice. The reason is that a supply disruption could mean that a business’ competitive edge is subject to change and thus vulnerable. When supply is at risk then there could be a disruption of delivery and evaluators will notice this factor.

Factor #5 – Customer Concentration

If a company has just one or two key customers, which is often the situation with many small businesses, this can be seen as a serious problem.

Factor #6 – Company or Industry Life Cycle

A business, who by its very nature, may be reaching the end of an industry life cycle, for example, typewriter repair, will also face challenges during the evaluation process. A business that is facing obsolescence usually has bleak prospects.

There are other issues that can also impact the valuation of a company. Some factors can include out of date inventory, as well as reliance on short contracts and factors such as third-party or franchise approvals being necessary for selling a company. The list of factors that can negatively impact the value of a company is indeed long. Working with a business broker is one way to address these potential problems before placing a business up for sale.

Find out the value of your business and see how you score on the Eight Factors that Drive Your Company’s Value by completing the Value Builder Questionnaire here:

Get Your Value Builder Score Now

 

Copyright: Business Brokerage Press, Inc.

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What Do Buyers Want in a Company?

Selling your business doesn’t have to feel like online dating, but for many sellers this is exactly what it can feel like. Many sellers are left wondering, “What exactly do buyers want to see in order to buy my company?” Working with a business broker is an excellent way to take some of the mystery out of this often elusive equation. In general, there are three areas that buyers should give particular attention to in order to make their businesses more attractive to sellers.

Area #1 – The Quality of Earnings

The bottom line, no pun intended, is that many accountants and intermediaries can be rather aggressive when it comes to adding back one-time or non-recurring expenses. Obviously, this can cause headaches for sellers. Here are a few examples of non-recurring expenses: a building undergoing foundation repairs, expenses related to meeting new government guidelines or legal fees involving a lawsuit or actually paying for a major lawsuit.

Buyers will want to emphasize that a non-recurring expense is just that, a one-time expense that will not recur, and are not in fact, a drain on the actual, real earnings of a company. The simple fact is that virtually every business has some level of non-recurring expenses each and every year; this is just the nature of business. However, by adding back these one-time expenses, an accountant or business appraiser can greatly complicate a deal as he or she is not allowing for extraordinary expenses that occur almost every year. Add-backs can work to inflate the earnings and lead to a failure to reflect the real earning power of the business.

Area #2 – Buyers Want to See Sustainability of Earnings

It is only understandable that any new owner will be concerned that the business in question will have sustainable earnings after the purchase. No one wants to buy a business only to see it fail due to a lack of earnings a short time later or buy a business that is at the height of its earnings or buy a business whose earnings are the result of a one-time contract. Sellers can expect that buyers will carefully examine whether or not a business will grow in the same rate, or a faster rate, than it has in the past.

Area #3 – Buyers Will Verify Information

Finally, sellers can expect that buyers will want to verify that all information provided is accurate. No buyer wants an unexpected surprise after they have purchased a business. Sellers should expect buyers to dig deep in an effort to ensure that there are no skeletons hiding in the closet. Whether its potential litigation issues or potential product returns or a range of other potential issues, you can be certain that serious buyers will carefully evaluate your business and verify all the information you’ve provided.

By stepping back and putting yourself in the shoes of a prospective buyer, you can go a long way towards helping ensure that the deal is finalized. Further, working with an experienced business broker is another way to help ensure that you anticipate what a buyer will want to see well in advance.

Copyright: Business Brokerage Press, Inc.

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How To Recover, and Thrive, After Splitting From Your Co-Founder

Four years ago Nexalogy CEO Claude Théoret was counting the employees he had to lay off. His company had burned through their $600,000 seed round of investment and he was running out of cash. An ugly split with a former co-founder had divided his team, and Théoret had to turn to his wife for a $40,000 loan.

Jump ahead to today and things are a little different for Théoret, who just agreed to be acquired by Datametrex AI Limited for $5.75 million.

In this episode of Built to Sell radio, you’ll learn:

– The hidden reason many founders can’t raise venture capital

– How to evaluate what it will be like to work for your acquirer before you agree to be purchased

– The types of issues that often derail an acquisition at the last minute

– What Théoret means when he says ‘the devil is going to get his 12%’

Listen Now

 

Find out how you score on the eight factors that drive your company’s value by completing the Value Builder Questionnaire:

Get Your Value Builder Score Now

 

One Tweak That Can (Instantly) Add Millions To The Value Of Your Business

 

If you’re trying to figure out what your business might be worth, it’s helpful to consider what
acquirers are paying for companies like yours these days. A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

Obsessing Over Your Multiple

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how
they can jack it up. After all, if your business has $500,000 in profit, and it trades for four
times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth
$4 million.

Obviously, your multiple will have a profound impact on the haul you take from the sale of
your business, but there is another number worthy of your consideration as well: the
number your multiple is multiplying.

How Profitability Is Open To Interpretation

Most entrepreneurs think of profit as an objective measure, calculated by an accountant,
but when it comes to the sale of your business, profit is far from objective. Your profit will
go through a set of “adjustments” designed to estimate how profitable your business will
be under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is
where you can dramatically spike your company’s value.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in
revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could
get a competent manager to run your business as a division of an acquirer for $100,000
per year. You could safely make the case to an acquirer that under their ownership, your
business would generate an extra $100,000 in profit. If they are paying you five times profit
for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and,
by extension, the value of your business. This is more art than science, and you need to be
prepared to defend your case for each adjustment. It is important that you make a good
case for how profitable your business will be in the hands of an acquirer.

Some of the most common adjustments relate to rent (common if you own the building
your company operates from and your company is paying higher-than-market rent), start–
up costs, one-off lawsuits or insurance claims and one-time professional services fees.
Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of
extra money can be made when selling your business.

Find out how you score on the eight factors that drive your company’s multiple by completing the Value Builder Questionnaire:

Get Your Value Builder Score Now

A Short Story All Family-Owned Businesses Should Read

When it comes to selling a family-owned business there are no shortage of complicating factors, but one in particular pops up quite often.  This article contains a true story about a popular family business that was built up from the ground up only to later meet a very sad ending.  While this is just one story, there are countless similar situations all across the country.

Once upon a time, there was a family-owned pizza dough company that had millions in sales. They sold their pizza dough to a range of businesses including restaurants and supermarkets. The founder had five children and split the business equally amongst them. Complicating matters was the fact that the children didn’t feel compelled to work in the family business. As a result, they turned the operation of the business over to two members of the third generation.

Once the founder’s children reached retirement age, they decided that they wanted to sell. So, they hired a business broker. The business broker began the search for an appropriate buyer, however, there was little interest. After considerable effort, the business broker found a successful businessman who offered to buy the pizza dough business for 50% of the sales, which was a good price. The business broker took the offer to the five owners and that is when the problems began.

A huge family argument was unleashed and the business broker was cut out of the loop. Later the offer was turned down flat and worst of all there was no counter-proposal, no attempt to negotiate price, terms, conditions or anything else. In short, the offer was finished and done. In the end, the business broker had lost several months of hard work.

Wondering what had happened, the business broker learned that two of the third-generation members who had been operating the business didn’t want to sell out of fear of losing their jobs. Over two decades later, the business has experienced almost no growth and is essentially breaking even. The owners, now in their 70s will likely never receive anything for their equity.

What you have just read is a true story, although the specific business type has been changed. This story serves to outline the problems that can arise when it comes time to sell a family business, especially if there is no agreement in place. Passing on this deal meant that the five children lost a considerable amount of money; this would have of course been money that could have made their retirement much more pleasant.

The story is both tragic and cautionary, in that this great business built from scratch by its founder was, in the end, left to flounder.

There is a moral to this story. Family-owned businesses need to have strict guidelines in place concerning issues such as salaries, benefits, what happens when one member wants to cash out and more. Such issues should be worked out with professionals, such as business brokers, years in advance.

Why VEEV Vodka Went for More Than 7 Times Revenue

Courtney Reum left Goldman Sachs in 2007 to start a Vodka business. He built VEEV up to more than $10 million in annual sales before he sold the company for more than seven times revenue.

Reum has gone on to start and invest in a number of businesses through his M13 venture firm, and in this episode you will learn:

  • – Why Reum believes Time is the new money
  • – Reum’s secrets for avoiding dilution when raising money
  • – The danger of “so what” sales
  • – The biggest mistake he sees founders make
  • – Why every company should be built to sell
  • – How to “pre-court” your strategic acquirers
  • – Why you should always sell with lots of “runway” left
  • – About getting “crammed down” and why that’s a bad thing
  • – How venture capital firms rig deals in their favor using preferred shares

This one is jam-packed with knowledge bombs. I think you’ll like it.

Listen Now

The Latest ‘Built to Sell’ Forbes Column

How To Lure A Giant Like Facebook Into Buying Your Company – You know you’re not supposed to say you want to sell your business, so how do you get someone interested in wanting to buy it?

Find out how you score on the eight factors that drive your company’s value by completing the Value Builder Questionnaire:

Get Your Value Builder Score Now

Around the Web: A Month in Summary

A recent article from Divestopedia entitled “To Sell Your Business, Start with the End in Mind” explains the importance of planning your exit strategy in the early stages of your business. The article points out that emotion plays a big part in humans’ decision making process, and when a potential buyer perceives that the owner has not prepared a company for sale, they associate this with uncertainty, effort and stress that will accompany rebuilding the business.

Focusing on building your company’s culture is also very important for exit planning because a well-established company culture will continue to endure after you’re gone. Creating a self-sustaining culture that involves talented employees, succession plans for key people, talent acquisition and talent retention can help your business be seen as more valuable in the future.

Click here to read the full article.

A recent article posted on BizJournals.com entitled “How to know when the ride is over and it’s time to get off” gives an overview of how to know when to exit your business and how to be prepared when the time is right. Here are 4 signs that it might be time to sell your business:

  1. Your health is declining or your business is negatively affecting your health
  2. You’ve lost your passion for the business
  3. Your priorities have changed and the business is no longer your top priority
  4. You are hesitant or unable to invest money in the growth of your business

Business owners should periodically review these factors and ask themselves if they are still the right person for the job. It’s also good to consult with a trusted advisor to start planning an exit strategy now so you’re prepared when the time comes to sell all or part of your business.

Click here to read the full article.

A recent article posted on Forbes.com entitled “Business Value And Lottery Tickets” explains how you have to be realistic about your goals for your business especially in how they relate to your exit plan in the future. Take a look at how your business is doing and then quantify your goals for your business by asking yourself questions such as “How much money do I need to have when I leave my business?”

Next, you need to figure out a plan for your business to grow enough to reach those goals. The article states three common problems that owners have in this situation:

  1. Relying on assumptions instead of consulting with an exit-planning advisor
  2. Trying to do everything instead of delegating
  3. Remaining stagnant instead of taking on new roles to ignite change in the business

It is also important to have a good management team in place to help you achieve your goals. It’s not luck, and you have to look at the numbers and facts to get your business where you need it to be for a successful exit.

Click here to read the full article.

A recent article from the Axial Forum entitled “How to Handle Risky Customer Concentration in an M&A Target” explains the best practices to follow if a potential acquisition has a lot of customer concentration. In many companies, it’s common for 20% of customers to account for 80% of the company’s revenue. In this case, it is vital to talk to multiple people within these important accounts and ask a variety of questions to make sure you find out how their relationship with the company is really structured.

Most importantly, you want to ask the contact how likely they would be to recommend the target company to another colleague, which in turn will help you determine the Net Promoter Score (NPS) rating of the company. The NPS is very useful because it has statistically shown that higher rated companies are more profitable, outpace their competitors, and have stronger cross-selling opportunities.

It’s a good practice to look deeper into a company’s relationships with its customers when acquiring a business that you’ll want to eventually grow.

Click here to read the full article.

A recent article posted on The Standard entitled “Do you have a business you are eyeing? Consider these tips before taking the leap” explores a variety of factors to take into consideration before buying a business. Here are some things to think about when making the decision to buy:

  1. Evaluate yourself and make sure you have the skills to take on the specific type of business
  2. Find out why the business is being sold
  3. Carry out due diligence in screening the business so there’s no surprises along the way
  4. Obtain a professional valuation of the business
  5. Close the deal and consider using a legal officer for the final process

Always be sure to find out the good and the bad before you decide to purchase a business.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recent article posted on BizJournals.com entitled “Top 5 rules on preparing your company for sale” explains how the best time to begin preparing your business for sale is right now. The article highlights these main rules to follow:

  1. Start auditing your financial statements now as these will be required by the purchaser.
  2. Keep appropriate, complete corporate books and records so everything is ready to be presented to a buyer when the time comes.
  3. Obtain a professional valuation of your company so you can use this as a roadmap for growing your company and ultimately maximizing the exit price.
  4. Use the valuation of your company to determine what assets are superfluous and will not be valued. This can also help you make future decisions with your business strategy.
  5. Start the process now for finding a second in command who could easily replace the founder of the company. This will be very valuable to the future buyer after the sale is made.

Starting to prepare your business for sale now will help make the sale process much easier when you decide it’s time to sell.

Click here to read the full article.

 

A recent article from The Axial Forum entitled “Maximizing Your Business Value Before a Sale” gives insight into how to get the most out of a business sale. According to the article, the key to a successful sale comes in driving business value before selling the business. This can be done in a wide variety of areas of the business, from aiming to increase sales growth to product innovation, improvement of backend systems, and more.

Many of the methods and value-driving factors can take many months, if not several years, to implement and improve, so proper thought and planning is necessary to get the most out of the process. In the ideal situation, maximizing business value ahead of and in preparation for a sale will make a business much more attractive to a potential buyer.

Click here to read the full article.

 

A recent article from Divestopedia.com entitled “5 Essential Steps to Ensure Due Diligence in Private Company Acquisitions” explains the necessity of due-diligence during the acquisition process. Due diligence cannot be stressed enough and the fact that it is always popping up just shows its importance and relevance to a successful deal process. The following steps outline critical components of completing due diligence for an acquiring company:

  1. Construct an Investment Thesis
  2. Analyze Your Competitive Position
  3. Measure the Strength and Stability of the Acquired Company
  4. Revenue Synergy
  5. Integration

While this is not an exhaustive list, the aforementioned steps outline an important process necessary for any acquirer to ensure they are best prepared for a successful acquisition.

Click here to read the full article.

 

A recent article posted on The Axial Forum entitled “Capital Superabundance is Transforming Middle-Market M&A” explores the effect that the abundance of cheap capital is having on middle-market transactions. This “capital superabundance” is having effects across the middle-market sector among private equity firms, corporate buyers, investment bankers, and middle market companies alike. Brand value is more important than ever in the eyes of private equity companies and corporate buyers, investment bankers are using data and advanced technological systems to find clients, and for sellers, there has never been a better time to sell a business.

The fact of the matter is the market is hot right now. Though capital superabundance is just one of many varying parts of this market change, it is a driving factor behind much of the success we’re seeing.

Click here to read the full article.

 

A recent article posted on Divestopedia.com entitled “Know Your Buyer” outlines the importance of knowing and understanding potential buyers in the market when putting a business up for sale. This is important because knowing the different types of potential buyers will give an owner insight into how to approach and appeal to the types of buyers they want to take over their company.

Different types of buyers will likely have different motivations and therefore produce different outcomes for a business transaction, so knowing and understanding them will help to give an owner better control over the future of their company and ideally help make the right decision on who to sell to.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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When Two Million Dollars is Just Not Enough

Not everyone wants to sell when they feel as though they have to sell. Life changes, such as divorce or illness, can trigger the sale of a business. Everything from declining business revenue to partnership problems and more can send business owners scrambling for the exit sign. However, selling isn’t always an option, especially for small businesses. In this article, we will take a closer look at just such a situation.

The business under consideration is a successful distribution business, which is also a classic example of a value-enhanced business. The two owners each draw several hundred thousand from the business each year to go along with a range of other benefits. If hypothetically, the business was to sell for $2 million dollars, each of the owners would receive approximately $1 million. Of course, this sounds like a sizable amount. So, what is the problem?

When one stops to factor in such variables as taxes, closing expenses and debt, that $1 million-dollar number has shrunk dramatically, leaving each owner with much less, perhaps as little as just two years of income. In such a situation, selling isn’t a great idea. Many owners of small companies want to “cash in” and retire only to discover that their business isn’t worth enough to do so.

Owners who want to retire but can’t afford to do so are in a difficult position. Such owners may have already “checked out” mentally and in the process, have lost their focus resulting in a failure to both invest financially and creatively in the business. In turn, this decreases the value of the business even more, as competitors may likely move in to fill the void.

So, what does all of this mean for business owners? Business owners don’t want to get stuck in the position we discussed thus far. Instead, business owners want to sell at the optimal moment, when a business is at its high point and the owners are not considering retiring and feel as though they have to sell.

Determining when is the best time to sell can be one of the single smartest business decisions that a business owner ever makes. Working with a professional and experienced business broker is a fast and simple way to determine if the time is right to sell your business or if you should wait. Waiting until the optimal moment to sell has passed you by could be a painful experience.

Copyright: Business Brokerage Press, Inc.

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Three Common Errors Caused by Inexperience

The old saying that “there is no replacement for experience” is a truism that has stood the test of time. The simple fact is that a lack of experience can dismantle your deal.

Consider the following scenario – a business owner nearing retirement owns a multi-location retail operation that is doing several million in annual sales. He interviews a well-respected and experienced intermediary and is impressed.

However, the business owner’s niece has recently received her MBA and has told her uncle that she can handle the sale of his business and in the process, save him a bundle. On paper, everything sounds fine, but as it turns out the lack of experience gives this business owner less than optimal results.

Let’s take a look at a few problems that recently arose with our nameless, but successful, business owner and his well-meaning and smart, but inexperienced niece.

Error #1 No Confidentiality Agreements

One problem is that the business owner and his niece don’t use confidentiality agreements with prospective buyers. As a result, competitors, suppliers, employees and customers all learn that the business is available for sale. Of course, learning that the business is for sale could cause a range of problems, as both employees and suppliers get nervous about what the sale could mean. Ultimately, this could undermine the sale of the business.

Error #2 Incorrect Financials

Another problem is that the inexperienced MBA was supposed to prepare an offering memorandum. In the process, she compiled some financials together that had not been audited. While on paper this seemed like a small mistake, it failed to include several hundred thousand dollars the owner took. He simply forgot to mention this piece of information to his niece. Clearly this mishap dramatically impacted the numbers. Additionally, this lack of information would likely result in lower offers as well as lower bids, or even decrease overall prospective buyer interest.

Error #3 Failing to Include the CFO

A third key mistake in this unfortunate story was a failure to bring in the CFO. The niece felt that she could handle the financial details, but in the end, her assumption was incorrect. The owner and the niece failed to realize that prospective buyers would want to meet with their CFO, and that he would be involved in the due diligence process. In short, not bringing the CFO on board early in the process was a blunder that greatly complicated the process.

The problem is clear. Selling a business, any business, is far too important for an amateur. When it comes time to sell your business, you want an experienced business broker with a great track record. Again, there is no replacing experience.

Copyright: Business Brokerage Press, Inc.

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