We believe it would be a big mistake to sell your business on your own, assuming you have a business worth seven or eight figures. We recommend the remaining steps only be accomplished with the help of your team.
Back in December 2006, we were brought in to provide wealth management services to the owners of a growing business who had a multi-billion dollar company looking to buy them. The owners, realizing the fast-paced track of the deal and the value of an M&A, hired Summa Financial Group LLC of San Jose to represent them.
The buyer was a much bigger player than the seller. In fact, although the price of the deal represented a tremendous cash-out event for the owners, it was a relatively small transaction for the buyer.
The owners received a $5 million letter of intent. In response, the ownership team developed a PowerPoint presentation showing the buyer’s CFO, investment banker, and business development director step-by-step why the deal should be valued at $10 million.
They didn’t use the traditional method of valuing a company of this type. Due to the proprietary nature of the company’s product, they took a common-sense approach, showing the buyer today’s value based on industry projections and the tremendous return on investment they should expect. The buyer accepted the analysis and responded with a $10 million offer.
The deal is expected to close this spring.
One of the values an intermediary brings to the table is negotiating skills. This example highlights one of several issues that may occur in a complex sales transaction.
Qualified M&A intermediaries are committed to achieving the highest value and the best terms, and assisting in limiting the seller’s tax liabilities.
When you begin considering cashing-out and discussing your business with other people, you must be able to access and communicate the essential information about your business. Below is a sample list of what you should organize and prepare.
- Business focus
- Business strategy and differentiators
- Brief history
- Organizational chart
- Customer profile
- Nature of products and/or services provided
- Do you have any key employees who may transfer with the sale?
- Primary ways in which you get customers
- Does any one source represent the majority of your new business?
What do you do to help ensure the retention of customers and employees?
- How has your business grown in gross revenues over the past five years?
- How has your mix of income evolved over the past five years?
- How have your overhead costs changed over the past five years?
- What is a responsible projection of future income from your current business?
Step four: Value your business
CEOs often ask us, “How much is my business worth?” Our answer is usually “What the market will bear.”
You need to estimate the company’s value for you to find the right buyer. A valuation represents the company’s total worth. You’ll need to account for your earnings, assets, losses/debts, and the industry
You want to get a sense of the value of your business, the primary considerations in valuing a business are:
- Cash flow
- Industry valuation standards
- Current market environment
Cash Flow: The profitability or cash flow of a business has a significant impact on its value. Cash flow is the amount of money that flows to the bottom line in your business after covering all expenses and paying fair market compensation to all professionals, including the owners.
Risk: There is a risk inherent in making any investment. The amount of risk of your business relative to other comparable investments impacts the value of your company.
Factors that can influence the level of risk in business include:
- Mix of revenues
- Technology Use
- Geographic location
- Staffing issues
- Marketing process
- Economic and market conditions
- Cost structure
- Dependency on owners
- Customer profile
Growth: Because valuation is a forward-looking exercise, projected growth in long-term earnings also has a major impact on the value of a business.
Transferability: Prospective buyers are willing to pay a reasonable price for a business that can demonstrate an ability to generate future cash flow. Buyers are not willing to reward past performance unless there is a reasonable indication of continued performance in the future. Therefore, transferable revenue streams and business practices have a positive impact on the value of a business.
Business Valuation Methods
Some of the methods that can assist you in determining the value of your business include:
Asset-Based business valuation
The asset-based business valuation method is also known as the cost-based method. It’s used to estimate the value of a business as the total of the costs needed to create another business of equal economic status. this method counts all the inventory, equipment, cash, stock, patents, trademarks, and customer relationships.
The method calculates the company’s value depending on the purchases and sales of comparable companies in the same industry. Comparative transaction method and guideline public traded company method are included as part of professional business appraisals.
Income-Based Business Valuation
The income-based valuation method determines your business value based on its income-producing risk and capacity. Discounting and capitalization are some of the techniques used in this method.
Capitalization rates and discount is considered as part of business risk. The discounted cash flow valuation method is the most popular way of determining a business’s value.
The relative valuation method compares the value of your business assets to the value of the same assets, and that gives you a sensible asking price.
Sometimes using different business valuation methods is the best way to determine a selling price. Working with a financial advisor in Miami can help you compare various methods to prepare for the acquisition process and merger. Pillar Wealth Management can also assist with other concerns such as retirement planning; just give us a call to start improving your portfolio.
Christopher G. Snyder and Haitham “Hutch” E. Ashoo are principals of Pillar Financial Services in Walnut Creek. Contact them at 925-356-6780.