Business Valuation | Term Life
Business valuation is a process and a set of procedures used to determine the economic value of an owner’s interest in a business. Business valuation is often used to estimate the selling price of a business, resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among the business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal disputes.
Standard and Premise of Business Value
Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value.
Business valuation results can vary considerably depending upon the choice of both the standard and premise of value. For example, a business buyer and seller may bargain to establish the value of business assets that approaches the fair market value standard.
However, the value conclusions based on the going concern premise and that of assemblage of business assets may be quite different. One reason is that an operating business creates value by means of its ability to coordinate its capital, human and management resources to produce economic income. The same set of assets not currently used to produce income is generally worth less.
Reasons for Business Valuation
Business people may need to conduct business valuation for a number of reasons including sale, estate tax planning, estate tax valuation, divorce, business purchase price allocation, collateral documentation, litigation and documenting that a sales price is equitable.
Fair market value
“Fair market value”, a central standard of measuring business value, is defined as the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. See IRS Rev. Rul. 59-60, 1959-1, Cum. Bulletin 237, codified at 26 C.F.R. § 20.2031-1(b).
The fair market value standard incorporates certain assumptions, including the assumptions that the hypothetical purchaser is reasonably prudent and rational but is not motivated by any synergistic or strategic influences; that the business will continue as a going concern and not be liquidated; that the hypothetical transaction will be conducted in cash or equivalents; and that the parties are willing and able to consummate the transaction.
These assumptions might not, and probably do not, reflect the actual conditions of the market in which the subject business might be sold. However, these conditions are assumed because they yield a uniform standard of value, after applying generally-accepted valuation techniques, which allows meaningful comparison between businesses which are similarly situated.
Elements of business valuation
Economic conditions
A business valuation report generally begins with a description of national, regional and local economic conditions existing as of the valuation date, as well as the conditions of the industry in which the subject business operates. A common source of economic information for the first section of the business valuation report is the Federal Reserve Board’s Beige Book, published quarterly by the Federal Reserve Bank. State governments and industry associations often publish useful statistics describing regional and industry conditions.
Financial Analysis
The financial statement analysis generally involves common size analysis, ratio analysis (liquidity, turnover, profitability, etc.), trend analysis and industry comparative analysis. This permits the valuation analyst to compare the subject company to other businesses in the same or similar industry, and to discover trends affecting the company and/or the industry over time. By comparing a company’s financial statements in different time periods, the valuation expert can view growth or decline in revenues or expenses, changes in capital structure, or other financial trends. How the subject company compares to the industry will help with the risk assesment and ultimately help determine the discount rate and the selection of market multiples.
Normalization of financial statements
The most common normalization adjustments fall into the following four categories:
Comparability Adjustments. The valuator may adjust the subject company’s financial statements to facilitate a comparison between the subject company and other businesses in the same industry or geographic location. These adjustments are intended to eliminate differences between the way that published industry data is presented and the way that the subject company’s data is presented in its financial statements.
Non-operating Adjustments. It is reasonable to assume that if a business were sold in a hypothetical sales transaction (which is the underlying premise of the fair market value standard), the seller would retain any assets which were not related to the production of earnings or price those non-operating assets separately. For this reason, non-operating assets (such as excess cash) are usually eliminated from the balance sheet.
Non-recurring Adjustments. The subject company’s financial statements may be affected by events that are not expected to recur, such as the purchase or sale of assets, a lawsuit, or an unusually large revenue or expense. These non-recurring items are adjusted so that the financial statements will better reflect the management’s expectations of future performance.
Discretionary Adjustments. The owners of private companies may be paid at variance from the market level of compensation that similar executives in the industry might command. In order to determine fair market value, the owner’s compensation, benefits, perquisites and distributions must be adjusted to industry standards. Similarly, the rent paid by the subject business for the use of property owned by the company’s owners individually may be scrutinized.
Income, Asset and Market Approaches
Three different approaches are commonly used in business valuation: the income approach, the asset-based approach, and the market approach. Within each of these approaches, there are various techniques for determining the fair market value of a business. Generally, the income approaches determine value by calculating the net present value of the benefit stream generated by the business (discounted cash flow); the asset-based approaches determine value by adding the sum of the parts of the business (net asset value); and the market approaches determine value by comparing the subject company to other companies in the same industry, of the same size, and/or within the same region.
In determining which of these approaches to use, the valuation professional must exercise discretion. Each technique has advantages and drawbacks, which must be considered when applying those techniques to a particular subject company. Most treatises and court decisions encourage the valuator to consider more than one technique, which must be reconciled with each other to arrive at a value conclusion. A measure of common sense and a good grasp of mathematics is helpful.
INCOME APPROACHES
The income approaches determine fair market value by multiplying the benefit stream generated by the subject company times a discount or capitalization rate. The discount or capitalization rate converts the stream of benefits into present value. There are several different income approaches, including capitalization of earnings or cash flows, discounted future cash flows (“DCF”), and the excess earnings method (which is a hybrid of asset and income approaches). Most of the income approaches consider the subject company’s historical financial data; only the DCF method requires the subject company to provide projected financial data. Most of the income approaches look to the company’s adjusted historical financial data for a single period; only DCF requires data for multiple future periods. The discount or capitalization rate must be matched to the type of benefit stream to which it is applied. The result of a value calculation under the income approach is generally the fair market value of a controlling, marketable interest in the subject company, since the entire benefit stream of the subject company is most often valued, and the capitalization and discount rates are derived from statistics concerning public companies.
Discount or capitalization rates
A discount or capitalization rate is used to determine the present value of the expected returns of a business. The discount rate and capitalization rate are closely related to each other, but distinguishable. Generally speaking, the discount rate or capitalization rate may be defined as the yield necessary to attract investors to a particular investment, given the risks associated with that investment. The discount rate is applied only to discounted cash flow (DCF) valuations, which are based on projected business data over multiple periods of time. In DCF valuations, a series of projected cash flows is divided by the discount rate to derive the present value of the discounted cash flows. The sum of the discounted cash flows is added to a terminal value, which represents the present value of business cash flows into perpetuity. The sum of the discounted cash flows and the terminal value is the value of the business.
On the other hand, a capitalization rate is applied in methods of business valuation that are based on historical business data for a single period of time. The after-tax net cash flow capitalization rate is equal to the discount rate minus the long-term sustainable growth rate. The after-tax net cash flow of a business is divided by the capitalization rate to derive the present value. Capitalization rates may be modified so that they may be applied to after-tax net income or pre-tax cash flows or income. There are several different methods of determining the appropriate discount rates. The discount rate is composed of two elements: (1) the risk-free rate, which is the return that an investor would expect from a secure, practically risk-free investment, such as a government bond; plus (2) a risk premium that compensates an investor for the relative level of risk associated with a particular investment in excess of the risk-free rate. Most importantly, the selected discount or capitalization rate must be consistent with stream of benefits to which it is to be applied.
Build-Up Method
The Build-Up Method is a widely-recognized method of determining the after-tax net cash flow discount rate, which in turn yields the capitalization rate. The figures used in the Build-Up Method are derived from various sources. This method is called a “build-up” method because it is the sum of risks associated with various classes of assets. It is based on the principle that investors would require a greater return on classes of assets that are more risky. The first element of an Build-Up capitalization rate is the risk-free rate, which is the rate of return for long-term government bonds. Investors who buy large-cap equity stocks, which are inherently more risky than long-term government bonds, require a greater return, so the next element of the Build-Up method is the equity risk premium. In determining a company’s value, the long-horizon equity risk premium is used because the Company’s life is assumed to be infinite. The sum of the risk-free rate and the equity risk premium yields the long-term average market rate of return on large public company stocks.
Similarly, investors who invest in small cap stocks, which are riskier than blue-chip stocks, require a greater return, called the “size premium.” Size premium data is generally available from two sources: Morningstars’ (formerly Ibbotson & Associates’) Stocks, Bonds, Bills & Inflation and Duff & Phelps’ Risk Premium Report.
By adding the first three elements of a Build-Up discount rate, we can determine the rate of return that investors would require on their investments in small public company stocks. These three elements of the Build-Up discount rate are known collectively as the “systematic risks.”
In addition to systematic risks, the discount rate must include “unsystematic risks,” which fall into two categories. One of those categories is the “industry risk premium.” Morningstar’s yearbooks contain empirical data to quantify the risks associated with various industries, grouped by SIC industry code.
The other category of unsystematic risk is referred to as “specific company risk.” Historically, no published data has been available to quantify specific company risks. However as of late 2006, new research has been able to quantify, or isolate, this risk for publicly-traded stocks through the use of Total Beta calculations. P. Butler and K. Pinkerton have outlined a procedure using a modified Capital Asset Pricing Model (CAPM) to calculate the company specific risk premium. The model uses an equality between the standard CAPM which relies on the total beta on one side of the equation; and the firm’s beta, size premium and company specific risk premium on the other. The equality is then solved for the company specific risk premium as the only unknown. While this is ground-breaking research, it has yet to be adopted and used by the valuation community at large.
It is important to understand why this capitalization rate for small, privately-held companies is significantly higher than the return that an investor might expect to receive from other common types of investments, such as money market accounts, mutual funds, or even real estate. Those investments involve substantially lower levels of risk than an investment in a closely-held company. Depository accounts are insured by the federal government (up to certain limits); mutual funds are composed of publicly-traded stocks, for which risk can be substantially minimized through portfolio diversification; and real estate almost invariably appreciates in value of long time horizons.
Closely-held companies, on the other hand, frequently fail for a variety of reasons too numerous to name. Examples of the risk can be witnessed in the storefronts on every Main Street in America. There are no federal guarantees. The risk of investing in a private company cannot be reduced through diversification, and most businesses do not own the type of hard assets that can ensure capital appreciation over time. This is why investors demand a much higher return on their investment in closely-held businesses; such investments are inherently much more risky.
Capital Asset Pricing Model (“CAP-M”)
The Capital Asset Pricing Model is another method of determining the appropriate discount rate in business valuations. The CAP-M method originated from the Nobel Prize winning studies of Harry Markowitz, James Tobin and William Sharpe. Like the Ibbotson Build-Up method, the CAP-M method derives the discount rate by adding a risk premium to the risk-free rate. In this instance, however, the risk premium is derived by multiplying the equity risk premium times “beta,” which is a measure of stock price volatility. Beta is published by various sources (including Ibbotson Associates, which was used in this valuation) for particular industries and companies. Beta is associated with the systematic risks of an investment.
One of the criticisms of the CAP-M method is that beta is derived from the volatility of prices of publicly-traded companies, which are likely to differ from private companies in their capital structures, diversification of products and markets, access to credit markets, size, management depth, and many other respects. Where private companies can be shown to be sufficiently similar to public companies, however, the CAP-M model may be appropriate.
Weighted Average Cost of Capital (“WACC”)
The weighted average cost of capital is the third major approach to determining a discount rate. The WACC method determines the subject company’s actual cost of capital by calculating the weighted average of the company’s cost of debt and cost of equity. The WACC capitalization rate must be applied to the subject company’s net cash flow to invested equity. One of the problems with this method is that the valuator may elect to calculate WACC according to the subject company’s existing capital structure, the average industry capital structure, or the optimal capital structure. Such discretion detracts from the objectivity of this approach, in the minds of some critics.
Once the capitalization or discount rate is determined, it must be applied to an appropriate economic income streams: pretax cash flow, aftertax cash flow, pretax net income, after tax net income, excess earnings, projected cash flow, etc. The result of this formula is the indicated value before discounts. Before moving on to calculate discounts, however, the valuation professional must consider the indicated value under the asset and market approaches.
Careful matching of the discount rate to the appropriate measure of economic income is critical to the accuracy of the business valuation results. Net cash flow is a frequent choice in professionally conducted business appraisals. The rationale behind this choice is that this earnings basis corresponds to the equity discount rate derived from the Build-Up or CAP-M models: the returns obtained from investments in publicly traded companies can easily be represented in terms of net cash flows. At the same time, the discount rates are generally also derived from the public capital markets data.
Asset-based approaches
The value of asset-based analysis a business is equal to the sum of its parts. That is the theory underlying the asset-based approaches to business valuation. The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. In contrast to the income-based approaches, which require the valuation professional to make subjective judgments about capitalization or discount rates, the adjusted net book value method is relatively objective. Pursuant to accounting convention, most assets are reported on the books of the subject company at their acquisition value, net of depreciation where applicable. These values must be adjusted to fair market value wherever possible. The value of a company’s intangible assets, such as goodwill, is generally impossible to determine apart from the company’s overall enterprise value. For this reason, the asset-based approach is not the most probative method of determining the value of going business concerns. In these cases, the asset-based approach yields a result that is probably lesser than the fair market value of the business. In considering an asset-based approach, the valuation professional must consider whether the shareholder whose interest is being valued would have any authority to access the value of the assets directly. Shareholders own shares in a corporation, but not its assets, which are owned by the corporation. A controlling shareholder may have the authority to direct the corporation to sell all or part of the assets it owns and to distribute the proceeds to the shareholder(s). The non-controlling shareholder, however, lacks this authority and cannot access the value of the assets. As a result, the value of a corporation’s assets is rarely the most relevant indicator of value to a shareholder who cannot avail himself of that value. Adjusted net book value may be the most relevant standard of value where liquidation is imminent or ongoing; where a company earnings or cash flow are nominal, negative or worth less than its assets; or where net book value is standard in the industry in which the company operates. None of these situations applies to the Company which is the subject of this valuation report. However, the adjusted net book value may be used as a “sanity check” when compared to other methods of valuation, such as the income and market approaches.
Market approaches
The market approach to business valuation is rooted in the economic principle of competition: that in a free market the supply and demand forces will drive the price of business assets to a certain equilibrium. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise. It is similar in many respects to the “comparable sales” method that is commonly used in real estate appraisal. The market price of the stocks of publicly traded companies engaged in the same or a similar line of business, whose shares are actively traded in a free and open market, can be a valid indicator of value when the transactions in which stocks are traded are sufficiently similar to permit meaningful comparison.
The difficulty lies in identifying public companies that are sufficiently comparable to the subject company for this purpose. Also, as for a private company, the equity is less liquid (in other words its stocks are less easy to buy or sell) than for a public company, its value is considered to be slightly lower than such a market-based valuation would give
Guideline Public Company method
The Guideline Public Company method entails a comparison of the subject company to publicly traded companies. The comparison is generally based on published data regarding the public companies’ stock price and earnings, sales, or revenues, which is expressed as a fraction known as a “multiple.” If the guideline public companies are sufficiently similar to each other and the subject company to permit a meaningful comparison, then their multiples should be nearly equal. The public companies identified for comparison purposes should be similar to the subject company in terms of industry, product lines, market, growth, and risk.
Transaction Method or Direct Market Data Method
Using this method, the valuation analyst may determine market multiples by reviewing published data regarding actual transactions involving either minority or controlling interests in either publicly traded or closely held companies. In judging whether a reasonable basis for comparison exists, the valuation analysis must consider: (1) the similarity of qualitative and quantitative investment and investor characteristics; (2) the extent to which reliable data is known about the transactions in which interests in the guideline companies were bought and sold; and (3) whether or not the price paid for the guideline companies was in an arms-length transaction, or a forced or distressed sale.
Discounts and premiums
The valuation approaches yield the fair market value of the Company as a whole. In valuing a minority, non-controlling interest in a business, however, the valuation professional must consider the applicability of discounts that affect such interests. Discussions of discounts and premiums frequently begin with a review of the “levels of value.” There are three common levels of value: controlling interest, marketable minority, and non-marketable minority. The intermediate level, marketable minority interest, is lesser than the controlling interest level and higher than the non-marketable minority interest level. The marketable minority interest level represents the perceived value of equity interests that are freely traded without any restrictions. These interests are generally traded on the New York Stock Exchange, AMEX, NASDAQ, and other exchanges where there is a ready market for equity securities. These values represent a minority interest in the subject companies – small blocks of stock that represent less than 50% of the company’s equity, and usually much less than 50%. Controlling interest level is the value that an investor would be willing to pay to acquire more than 50% of a company’s stock, thereby gaining the attendant prerogatives of control. Some of the prerogatives of control include: electing directors, hiring and firing the company’s management and determining their compensation; declaring dividends and distributions, determining the company’s strategy and line of business, and acquiring, selling or liquidating the business. This level of value generally contains a control premium over the intermediate level of value, which typically ranges from 25% to 50%. An additional premium may be paid by strategic investors who are motivated by synergistic motives. Non-marketable, minority level is the lowest level on the chart, representing the level at which non-controlling equity interests in private companies are generally valued or traded. This level of value is discounted because no ready market exists in which to purchase or sell interests. Private companies are less “liquid” than publicly-traded companies, and transactions in private companies take longer and are more uncertain. Between the intermediate and lowest levels of the chart, there are restricted shares of publicly-traded companies. Despite a growing inclination of the IRS and Tax Courts to challenge valuation discounts , Shannon Pratt suggested in a scholarly presentation recently that valuation discounts are actually increasing as the differences between public and private companies is widening . Publicly-traded stocks have grown more liquid in the past decade due to rapid electronic trading, reduced commissions, and governmental deregulation. These developments have not improved the liquidity of interests in private companies, however. Valuation discounts are multiplicative, so they must be considered in order. Control premiums and their inverse, minority interest discounts, are considered before marketability discounts are applied.
Discount for lack of control
The first discount that must be considered is the discount for lack of control, which in this instance is also a minority interest discount. Minority interest discounts are the inverse of control premiums, to which the following mathematical relationship exists: MID = 1 – [ 1 / (1 + CP)] The most common source of data regarding control premiums is the Control Premium Study, published annually by Mergerstat since 1972. Mergerstat compiles data regarding publicly announced mergers, acquisitions and divestitures involving 10% or more of the equity interests in public companies, where the purchase price is $1 million or more and at least one of the parties to the transaction is a U.S. entity. Mergerstat defines the “control premium” as the percentage difference between the acquisition price and the share price of the freely-traded public shares five days prior to the announcement of the M&A transaction. While it is not without valid criticism, Mergerstat control premium data (and the minority interest discount derived therefrom) is widely accepted within the valuation profession.
Discount for lack of marketability
Another factor to be considered in valuing closely held companies is the marketability of an interest in such businesses. Marketability is defined as the ability to convert the business interest into cash quickly, with minimum transaction and administrative costs, and with a high degree of certainty as to the amount of net proceeds. There is usually a cost and a time lag associated with locating interested and capable buyers of interests in privately-held companies, because there is no established market of readily-available buyers and sellers. All other factors being equal, an interest in a publicly traded company is worth more because it is readily marketable. Conversely, an interest in a private-held company is worth less because no established market exists. The IRS Valuation Guide for Income, Estate and Gift Taxes, Valuation Training for Appeals Officers acknowledges the relationship between value and marketability, stating: “Investors prefer an asset which is easy to sell, that is, liquid.” The discount for lack of control is separate and distinguishable from the discount for lack of marketability. It is the valuation professional’s task to quantify the lack of marketability of an interest in a privately-held company. Because, in this case, the subject interest is not a controlling interest in the Company, and the owner of that interest cannot compel liquidation to convert the subject interest to cash quickly, and no established market exists on which that interest could be sold, the discount for lack of marketability is appropriate. Several empirical studies have been published that attempt to quantify the discount for lack of marketability. These studies include the restricted stock studies and the pre-IPO studies. The aggregate of these studies indicate average discounts of 35% and 50%, respectively. Some experts believe the Lack of Control and Marketabilty discounts can aggregate discounts for as much as ninety percent of a Company’s fair market value, specifically with family owned companies.
Restricted stock studies
Restricted stocks are equity securities of public companies that are similar in all respects to the freely traded stocks of those companies except that they carry a restriction that prevents them from being traded on the open market for a certain period of time, which is usually one year (two years prior to 1990). This restriction from active trading, which amounts to a lack of marketability, is the only distinction between the restricted stock and its freely-traded counterpart. Restricted stock can be traded in private transactions and usually do so at a discount. The restricted stock studies attempt to verify the difference in price at which the restricted shares trade versus the price at which the same unrestricted securities trade in the open market as of the same date. The underlying data by which these studies arrived at their conclusions has not been made public. Consequently, it is not possible when valuing a particular company to compare the characteristics of that company to the study data. Still, the existence of a marketability discount has been recognized by valuation professionals and the Courts, and the restricted stock studies are frequently cited as empirical evidence. Notably, the lowest average discount reported by these studies was 26% and the highest average discount was 45%.
Option pricing
In addition to the restricted stock studies, U.S. publicly traded companies are able to sell stock to offshore investors (SEC Regulation S, enacted in 1990) without registering the shares with the Securities and Exchange Commission. The offshore buyers may resell these shares in the United States, still without having to register the shares, after holding them for just 40 days. Typically, these shares are sold for 20% to 30% below the publicly traded share price. Some of these transactions have been reported with discounts of more than 30%, resulting from the lack of marketability. These discounts are similar to the marketability discounts inferred from the restricted and pre-IPO studies, despite the holding period being just 40 days. Studies based on the prices paid for options have also confirmed similar discounts. If one holds restricted stock and purchases an option to sell that stock at the market price (a put), the holder has, in effect, purchased marketability for the shares. The price of the put is equal to the marketability discount. The range of marketability discounts derived by this study was 32% to 49%.
Pre-IPO studies
Another approach to measure the marketability discount is to compare the prices of stock offered in initial public offerings (IPOs) to transactions in the same company’s stocks prior to the IPO. Companies that are going public are required to disclose all transactions in their stocks for a period of three years prior to the IPO. The pre-IPO studies are the leading alternative to the restricted stock stocks in quantifying the marketability discount. The pre-IPO studies are sometimes criticized because the sample size is relatively small, the pre-IPO transactions may not be arm’s length, and the financial structure and product lines of the studied companies may have changed during the three year pre-IPO window.
Applying the studies
The studies confirm what the marketplace knows intuitively: Investors covet liquidity and loathe obstacles that impair liquidity. Prudent investors buy illiquid investments only when there is a sufficient discount in the price to increase the rate of return to a level which brings risk-reward back into balance. The referenced studies establish a reasonable range of valuation discounts from the mid-30%s to the low 50%s. The more recent studies appeared to yield a more conservative range of discounts than older studies, which may have suffered from smaller sample sizes. Another method of quantifying the lack of marketability discount is the Quantifying Marketability Discounts Model (QMDM).
This entry was posted on Monday, July 5th, 2010 at 3:50 am and is filed under term life.
Monday, July 5, 2010
Sell a Business, Key Factors for a Successful Exit | nfl carolina panthers jerseys
Sell a Business, Key Factors for a Successful Exit
Posted by hamiltion on July 4, 2010
You started your company 20 years ago “in your garage”, worked many 80 hour weeks, bootstrapped your growth, view your company with the pride of an entrepreneur, and are now considering your exit. The decision to sell is all too often a reactive one rather than a proactive one — the primary reasons are a serious health issue, owner burnout, the death of a principal, general industry decline or the loss of a major customer.
Exit on purpose and do it from a position of strength and receive the highest and best deal the market has to offer.
1. Hire a Mergers and Acquisitions firm to sell my business. You improve your odds of maximizing your proceeds while reducing the risk of business erosion by hiring a firm that specializes in selling businesses.
A large public company would not even consider an M&A transaction without representation from a Merrill Lynch, Goldman Sachs, Solomon Brothers or other high profile investment banking firm. Why? With so much at stake, they know they will do better by paying the experts. Companies in the $3 Million to $50 Million range fall below their radar, but there are mid market M&A firms that can provide similar services and process.
Generally when you sell your business, it is the one time in your life that you go through that experience. The buyer of the last company we represented for sale had previously purchased 25 companies. The sellers were good business people, knew their stuff, but this was their first and probably last business sale. Who had the advantage in this transaction? By engaging a professional M&A firm they helped balance the M&A experience scales.
2. Engage other professionals that have experience in business sale transactions. You should consider engaging a CPA firm that has the experience to advise you on important tax and accounting issues that can literally result in swings of hundreds of thousands of dollars.
What are the tax implications of a stock purchase versus an asset purchase? A lower offer on a stock purchase may be far superior to a higher offer on an asset purchase after the impact of taxes on your realized proceeds. Is the accountant that does your books qualified to advise you on that issue? Would your accountant know the best way to allocate the purchase price on an asset sale between hard assets, good will, employment agreements and non-compete agreements?
Remember, each element of deal structure that is favorable to the seller for tax or risk purposes is generally correspondingly unfavorable to the buyer, and vice versa. Therefore the experienced team for the buyer is under instructions to make an offer with the most favorable tax and reps and warranties consequences for their client. You need a professional team that can match the buyer’s team’s level of experience with deal structure, legal, and tax issues.
3. Be reasonable in your expectations on sales price and terms. The days of irrational exuberance are over. Strategic buyers, private equity groups, corporate buyers, and other buyers are either very smart or do not last very long as buyers. I hate rules of thumb, but generally there is a range of sales prices for similar businesses with similar growth profiles and similar financial performance. That being said, however, there is still a range of selling prices.
So, for example, let’s say that the sales price for a business in the XYZ industry is a multiple of between 4 and 5.5 times EBITDA. Your objective and the objective of a good M&A advisor is to sell your business at the top end of the range under favorable terms. In order for you to sell your business outside of that range you must have a very compelling competitive advantage, collection of intellectual property, unusual growth prospects, or significant barriers to entry that would justify a premium purchase price.
If you think about the process of detailing your car before you offer it for sale, a good M&A advisor will assist you in that process for your business. Let’s say, for example, that 4 to 5.5 multiple from above was the metric in your industry and you had an EBITDA for the last fiscal year of $2.5 million. Your gross transaction proceeds could range from $10 million to $13.75 million.
A skilled M&A firm with a proven process can move you to the top of your industry’s range. The impact of hitting the top of the sales price range vs. the bottom more than justifies the success fee you pay to your M&A professionals.
4. In the business selling process, disclose, disclose, disclose, and do it early. A seemingly insignificant minor negative revealed early in the process is an inconvenience, a hurdle, or a point to negotiate around.
That same negative revealed during negotiations, or worse yet, during due diligence, becomes, at best, a catalyst for reexamining the validity of every piece of data to, at worse, a deal breaker. No contract in the world can cover every eventuality if there is not a fundamental meeting of the minds and a trust between the two parties.
Unless you are lucky enough to get an all cash offer without any reps and warranties, you are going to be partnered with your buyer for some period in the future. Buyers try to keep you on the hook with reps and warranties that last for a few years, employment contracts, or non-competes that last, escrow funds, seller notes, etc.
These all serve a dual role to reduce the risk of future surprises. If future material surprises occur, buyers tend to be punitive in their resolution with the seller. Volunteer to reveal your company’s warts early in the process. That will build trust and credibility and will ensure you get to keep all of the proceeds from your sale.
5. Be flexible and open to creative deal structure. Everything is a negotiation. You may have in mind that you want a gross purchase price of $13 million and all cash at close. Maybe the market does not support both targets. You may be able to get creative in order to reach that purchase price target by agreeing to carry a seller note.
If the sale process produces multiple bids and the best one is $11.3 million cash at close. You may counter with a 7-year seller balloon note at 8% for $3 million with $10 million cash at close. If the buyer is a solid company, that may be a superior outcome than your original target because the best interest return you can currently get on your investments is 4%. Be flexible, be creative, and use your team to negotiate the hard parts and preserve your relationship with the buyer.
You may have spent your life’s work building your business to provide you the income, wealth creation, and legacy that you had planned and hoped for. You prepared and were competitive and tireless in your approach. You have one final act in your business. Make that your final business success. Exit on purpose and do it from a position of strength and receive the highest and best deal the market has to offer.
Posted by hamiltion on July 4, 2010
You started your company 20 years ago “in your garage”, worked many 80 hour weeks, bootstrapped your growth, view your company with the pride of an entrepreneur, and are now considering your exit. The decision to sell is all too often a reactive one rather than a proactive one — the primary reasons are a serious health issue, owner burnout, the death of a principal, general industry decline or the loss of a major customer.
Exit on purpose and do it from a position of strength and receive the highest and best deal the market has to offer.
1. Hire a Mergers and Acquisitions firm to sell my business. You improve your odds of maximizing your proceeds while reducing the risk of business erosion by hiring a firm that specializes in selling businesses.
A large public company would not even consider an M&A transaction without representation from a Merrill Lynch, Goldman Sachs, Solomon Brothers or other high profile investment banking firm. Why? With so much at stake, they know they will do better by paying the experts. Companies in the $3 Million to $50 Million range fall below their radar, but there are mid market M&A firms that can provide similar services and process.
Generally when you sell your business, it is the one time in your life that you go through that experience. The buyer of the last company we represented for sale had previously purchased 25 companies. The sellers were good business people, knew their stuff, but this was their first and probably last business sale. Who had the advantage in this transaction? By engaging a professional M&A firm they helped balance the M&A experience scales.
2. Engage other professionals that have experience in business sale transactions. You should consider engaging a CPA firm that has the experience to advise you on important tax and accounting issues that can literally result in swings of hundreds of thousands of dollars.
What are the tax implications of a stock purchase versus an asset purchase? A lower offer on a stock purchase may be far superior to a higher offer on an asset purchase after the impact of taxes on your realized proceeds. Is the accountant that does your books qualified to advise you on that issue? Would your accountant know the best way to allocate the purchase price on an asset sale between hard assets, good will, employment agreements and non-compete agreements?
Remember, each element of deal structure that is favorable to the seller for tax or risk purposes is generally correspondingly unfavorable to the buyer, and vice versa. Therefore the experienced team for the buyer is under instructions to make an offer with the most favorable tax and reps and warranties consequences for their client. You need a professional team that can match the buyer’s team’s level of experience with deal structure, legal, and tax issues.
3. Be reasonable in your expectations on sales price and terms. The days of irrational exuberance are over. Strategic buyers, private equity groups, corporate buyers, and other buyers are either very smart or do not last very long as buyers. I hate rules of thumb, but generally there is a range of sales prices for similar businesses with similar growth profiles and similar financial performance. That being said, however, there is still a range of selling prices.
So, for example, let’s say that the sales price for a business in the XYZ industry is a multiple of between 4 and 5.5 times EBITDA. Your objective and the objective of a good M&A advisor is to sell your business at the top end of the range under favorable terms. In order for you to sell your business outside of that range you must have a very compelling competitive advantage, collection of intellectual property, unusual growth prospects, or significant barriers to entry that would justify a premium purchase price.
If you think about the process of detailing your car before you offer it for sale, a good M&A advisor will assist you in that process for your business. Let’s say, for example, that 4 to 5.5 multiple from above was the metric in your industry and you had an EBITDA for the last fiscal year of $2.5 million. Your gross transaction proceeds could range from $10 million to $13.75 million.
A skilled M&A firm with a proven process can move you to the top of your industry’s range. The impact of hitting the top of the sales price range vs. the bottom more than justifies the success fee you pay to your M&A professionals.
4. In the business selling process, disclose, disclose, disclose, and do it early. A seemingly insignificant minor negative revealed early in the process is an inconvenience, a hurdle, or a point to negotiate around.
That same negative revealed during negotiations, or worse yet, during due diligence, becomes, at best, a catalyst for reexamining the validity of every piece of data to, at worse, a deal breaker. No contract in the world can cover every eventuality if there is not a fundamental meeting of the minds and a trust between the two parties.
Unless you are lucky enough to get an all cash offer without any reps and warranties, you are going to be partnered with your buyer for some period in the future. Buyers try to keep you on the hook with reps and warranties that last for a few years, employment contracts, or non-competes that last, escrow funds, seller notes, etc.
These all serve a dual role to reduce the risk of future surprises. If future material surprises occur, buyers tend to be punitive in their resolution with the seller. Volunteer to reveal your company’s warts early in the process. That will build trust and credibility and will ensure you get to keep all of the proceeds from your sale.
5. Be flexible and open to creative deal structure. Everything is a negotiation. You may have in mind that you want a gross purchase price of $13 million and all cash at close. Maybe the market does not support both targets. You may be able to get creative in order to reach that purchase price target by agreeing to carry a seller note.
If the sale process produces multiple bids and the best one is $11.3 million cash at close. You may counter with a 7-year seller balloon note at 8% for $3 million with $10 million cash at close. If the buyer is a solid company, that may be a superior outcome than your original target because the best interest return you can currently get on your investments is 4%. Be flexible, be creative, and use your team to negotiate the hard parts and preserve your relationship with the buyer.
You may have spent your life’s work building your business to provide you the income, wealth creation, and legacy that you had planned and hoped for. You prepared and were competitive and tireless in your approach. You have one final act in your business. Make that your final business success. Exit on purpose and do it from a position of strength and receive the highest and best deal the market has to offer.
Looking To Sell Your Information Technology Company – Avoid Some Common Mistakes | MoSo Technology Blog
Looking To Sell Your Information Technology Company – Avoid Some Common Mistakes | MoSo Technology Blog
Selling your information technology business is the most important transaction you will ever make. Mistakes in this process can greatly erode your transaction proceeds. Do not spend twenty years of your toil and skill building your business like a pro only to exit like an amateur. Below are ten common mistakes to avoid:
1. Selling because of an unsolicited offer to buy – One of the most common reasons owners tell us they sold their business was they got an offer from a competitor or more often these days, an Indian company looking to buy a customer base in the United States. If you previously were not considering this business sale, you probably have not taken some important personal and business steps to exit on your terms. The business may have some easily correctable issues that could detract from its value. You may not have prepared for an identity and lifestyle to replace the void caused by the separation from your company. If you are prepared, you are more likely to exit on your own terms.
2. Poor books and records – Business owners wear many hats. Sometimes they become so focused on the next version release that they are lax in financial record keeping. A buyer is going to do a comprehensive look into your financial records. If they are done poorly, the buyer loses confidence in what he is buying and his perception of risk increases. If he finds some negative surprises late in the process, the purchase price adjustments can be harsh. The transaction value is often attacked well beyond the economic impact of the surprise. Get a good accountant to do your books.
3. Going it alone – The business owner may be the foremost expert in GUI interfaces, but it is likely that his business sale will be a once in a lifetime occurrence. Mistakes at this juncture have a huge impact. It is especially critical to have a good M&A advisor if you are selling an information technology company because these companies do not fit traditional company valuation metrics. If an owner does not get the right representation and have several qualified buyers that covet his technology, he possibly can leave a lot of money on the table. Selling a technology company is complex. Is it a better deal to structure some of the transaction value as an earn out based on post acquisition sales performance?
Do you understand the difference in after tax proceeds between an asset sale and a stock sale? Your everyday bookkeeper may not, but a tax accountant surely does. Is your business attorney familiar with business sales legal work? Would he advise you properly on Reps and Warranties that will be in the purchase agreement? Your buyer’s team will have this experience. Your team should match that experience of it will cost you way more than their fees.
4. Skeletons in the closet – If your company has any, the due diligence process will surely reveal them. One of the key issues in information technology companies is the clear title to intellectual property. Are your employee agreements well written? If you hired outside programmers, was their agreement specific in ownership of their output? The concern of the buyer is that once it becomes public that the deep pockets company is owner, previous disgruntled employees or contractors may resurface looking to bring legal action.
Before your firm is turned inside out and the buyer spends thousands in this process and before the other interested buyers are put on hold – reveal that problem up-front. We sold a company that had an outstanding CFO. In the first meeting with us, he told us of his company’s under funded pension liability. We were able to bring the appropriate legal and actuarial resources to the table and give the buyer and his advisors plenty of notice to get their arms around the issue. If this had come up late in the process, the buyer might have blown up the deal or attacked transaction value for an amount far in excess of the potential liability.
5. Letting the word out – Confidentiality in the business sale process is crucial. If your competitors find out, they can cause a lot of damage to your customers and prospects. It can be a big drain on employee morale and productivity. What if your head of systems development gets skittish and entertains offers from other companies and leaves while you are selling? The buyer wants your top people and they represent a significant portion of your future transaction value. If word you are for sale gets out, your suppliers and bankers get nervous. Nothing good happens when the work gets out that your company is for sale.
6. Poor Contracts – Here we mean the day-to-day contracts that are in place with employees, customers, contractors, and suppliers. Do your employees have non-competes, for example? If your company has intellectual property, do you have very clear ownership rights defined in your employee and contractor agreements. If not, you could be looking at meaningful escrow holdbacks post closing. Are your customer agreements assignable without consent? If they are not, customers could cancel post transaction. Your buyer will make you pay for this one way or another. If you are tempted to sign that big deal at bargain rates to pump up your business selling price, think again. Locking in a contract at below market rates could actually cause a discount to your selling price.
7. Bad employee behavior – You need to make sure you have agreements in place so that employees cannot hold you hostage on a pending transaction. Key employees are key to transaction value. If you suspect there are issues, you may want to implement stay on bonuses. If you have a bad actor, firing him or her during a transaction could cause issues. You may want to be pre-emptive with your buyer and minimize any damage your employee might cause.
8. No understanding of your company’s value – Business valuations are complex. A good business broker or M & A advisor that has experience in your industry is your best bet. Business valuation firms are great for business valuations for gift and estate tax situations, divorce, etc. They tend to be very conservative and their results could vary significantly from your results from three strategic buyers in a battle to acquire your firm. Where a services business may sell for between 75% and 100% of last years sales, for example, technology companies are all over the map. One of our clients had a coveted piece of software technology and was able to get 8 X last years sales as his purchase price. We certainly could not have and would not have predicted that at the start of the engagement, but what a nice surprise. When it comes to selling your company, let the competitive market provide a value.
9. Getting into an auction of one – This is a silly visual, but imagine a big auction hall at Sotheby’s occupied by an auctioneer and one guy with an auction paddle. “Do I hear $5 million? Anybody $5.5 million?’ The guy is sitting on his paddle. Pretty silly, right? And yet we hear countless stories about a competitor coming in with an unsolicited offer and after a little light negotiating the owner sells. Another common story is the owner tells his banker, lawyer, or accountant that he is considering selling. His well-meaning professional says, “I have another client that is in your business. I will introduce you.” The next thing you know the business is sold. Believe me, these folks are buying you business at a big discount. That’s not silly at all!
10. Giving away value in negotiations and due diligence – When selling your business, your objective is to get the best terms and conditions. I know this is a shocker, but the buyer is trying to pay as little as possible and he is trying to get contractual terms favorable to him. These goals are not compatible with yours. The buyer is going to fight hard on issues like total price, cash at close, earn outs, seller notes, reps and warranties, escrow and holdbacks, post closing adjustments, etc. If you get into a meet in the middle compromise negotiation, before you know it, your Big Mac is a Junior Cheeseburger.
Due diligence has a dual purpose. The first is obviously to insure that the buyer knows exactly what he is paying for. The second is to attack transaction value with adjustments. Of course this happens after their LOI has sent the other bidders away for 30 to 60 days of exclusivity. If you don’t have a good team of advisors, this can get expensive
As my dad used to say, there is no replacement for experience. Another saying is that when a man with money and no experience meets a man with experience, the man with the experience walks away with the money and the man with the money walks away with some experience. Keep this in mind when contemplating the sale of your business. It will likely be your first and only experience. Avoid these mistakes and make that experience a profitable one.
Dave Kauppi is the editor of The Exit Strategist Newsletter and Managing Partner of MidMarket Capital, providing business broker services to entrepreneurs in information technology, software, and high tech. Visit and review our lists of buyers and sellers. The firm counsels clients in the areas of M&A, sales, valuations, “Smart Equity Capital Raises” and revenue enhancement.
avoid, common, company, Information, looking, mistakes, sell, some, Technology
This entry was posted by mosotech on July 4, 2010 at 11:20 am, and is filed under Information Technology.
Selling your information technology business is the most important transaction you will ever make. Mistakes in this process can greatly erode your transaction proceeds. Do not spend twenty years of your toil and skill building your business like a pro only to exit like an amateur. Below are ten common mistakes to avoid:
1. Selling because of an unsolicited offer to buy – One of the most common reasons owners tell us they sold their business was they got an offer from a competitor or more often these days, an Indian company looking to buy a customer base in the United States. If you previously were not considering this business sale, you probably have not taken some important personal and business steps to exit on your terms. The business may have some easily correctable issues that could detract from its value. You may not have prepared for an identity and lifestyle to replace the void caused by the separation from your company. If you are prepared, you are more likely to exit on your own terms.
2. Poor books and records – Business owners wear many hats. Sometimes they become so focused on the next version release that they are lax in financial record keeping. A buyer is going to do a comprehensive look into your financial records. If they are done poorly, the buyer loses confidence in what he is buying and his perception of risk increases. If he finds some negative surprises late in the process, the purchase price adjustments can be harsh. The transaction value is often attacked well beyond the economic impact of the surprise. Get a good accountant to do your books.
3. Going it alone – The business owner may be the foremost expert in GUI interfaces, but it is likely that his business sale will be a once in a lifetime occurrence. Mistakes at this juncture have a huge impact. It is especially critical to have a good M&A advisor if you are selling an information technology company because these companies do not fit traditional company valuation metrics. If an owner does not get the right representation and have several qualified buyers that covet his technology, he possibly can leave a lot of money on the table. Selling a technology company is complex. Is it a better deal to structure some of the transaction value as an earn out based on post acquisition sales performance?
Do you understand the difference in after tax proceeds between an asset sale and a stock sale? Your everyday bookkeeper may not, but a tax accountant surely does. Is your business attorney familiar with business sales legal work? Would he advise you properly on Reps and Warranties that will be in the purchase agreement? Your buyer’s team will have this experience. Your team should match that experience of it will cost you way more than their fees.
4. Skeletons in the closet – If your company has any, the due diligence process will surely reveal them. One of the key issues in information technology companies is the clear title to intellectual property. Are your employee agreements well written? If you hired outside programmers, was their agreement specific in ownership of their output? The concern of the buyer is that once it becomes public that the deep pockets company is owner, previous disgruntled employees or contractors may resurface looking to bring legal action.
Before your firm is turned inside out and the buyer spends thousands in this process and before the other interested buyers are put on hold – reveal that problem up-front. We sold a company that had an outstanding CFO. In the first meeting with us, he told us of his company’s under funded pension liability. We were able to bring the appropriate legal and actuarial resources to the table and give the buyer and his advisors plenty of notice to get their arms around the issue. If this had come up late in the process, the buyer might have blown up the deal or attacked transaction value for an amount far in excess of the potential liability.
5. Letting the word out – Confidentiality in the business sale process is crucial. If your competitors find out, they can cause a lot of damage to your customers and prospects. It can be a big drain on employee morale and productivity. What if your head of systems development gets skittish and entertains offers from other companies and leaves while you are selling? The buyer wants your top people and they represent a significant portion of your future transaction value. If word you are for sale gets out, your suppliers and bankers get nervous. Nothing good happens when the work gets out that your company is for sale.
6. Poor Contracts – Here we mean the day-to-day contracts that are in place with employees, customers, contractors, and suppliers. Do your employees have non-competes, for example? If your company has intellectual property, do you have very clear ownership rights defined in your employee and contractor agreements. If not, you could be looking at meaningful escrow holdbacks post closing. Are your customer agreements assignable without consent? If they are not, customers could cancel post transaction. Your buyer will make you pay for this one way or another. If you are tempted to sign that big deal at bargain rates to pump up your business selling price, think again. Locking in a contract at below market rates could actually cause a discount to your selling price.
7. Bad employee behavior – You need to make sure you have agreements in place so that employees cannot hold you hostage on a pending transaction. Key employees are key to transaction value. If you suspect there are issues, you may want to implement stay on bonuses. If you have a bad actor, firing him or her during a transaction could cause issues. You may want to be pre-emptive with your buyer and minimize any damage your employee might cause.
8. No understanding of your company’s value – Business valuations are complex. A good business broker or M & A advisor that has experience in your industry is your best bet. Business valuation firms are great for business valuations for gift and estate tax situations, divorce, etc. They tend to be very conservative and their results could vary significantly from your results from three strategic buyers in a battle to acquire your firm. Where a services business may sell for between 75% and 100% of last years sales, for example, technology companies are all over the map. One of our clients had a coveted piece of software technology and was able to get 8 X last years sales as his purchase price. We certainly could not have and would not have predicted that at the start of the engagement, but what a nice surprise. When it comes to selling your company, let the competitive market provide a value.
9. Getting into an auction of one – This is a silly visual, but imagine a big auction hall at Sotheby’s occupied by an auctioneer and one guy with an auction paddle. “Do I hear $5 million? Anybody $5.5 million?’ The guy is sitting on his paddle. Pretty silly, right? And yet we hear countless stories about a competitor coming in with an unsolicited offer and after a little light negotiating the owner sells. Another common story is the owner tells his banker, lawyer, or accountant that he is considering selling. His well-meaning professional says, “I have another client that is in your business. I will introduce you.” The next thing you know the business is sold. Believe me, these folks are buying you business at a big discount. That’s not silly at all!
10. Giving away value in negotiations and due diligence – When selling your business, your objective is to get the best terms and conditions. I know this is a shocker, but the buyer is trying to pay as little as possible and he is trying to get contractual terms favorable to him. These goals are not compatible with yours. The buyer is going to fight hard on issues like total price, cash at close, earn outs, seller notes, reps and warranties, escrow and holdbacks, post closing adjustments, etc. If you get into a meet in the middle compromise negotiation, before you know it, your Big Mac is a Junior Cheeseburger.
Due diligence has a dual purpose. The first is obviously to insure that the buyer knows exactly what he is paying for. The second is to attack transaction value with adjustments. Of course this happens after their LOI has sent the other bidders away for 30 to 60 days of exclusivity. If you don’t have a good team of advisors, this can get expensive
As my dad used to say, there is no replacement for experience. Another saying is that when a man with money and no experience meets a man with experience, the man with the experience walks away with the money and the man with the money walks away with some experience. Keep this in mind when contemplating the sale of your business. It will likely be your first and only experience. Avoid these mistakes and make that experience a profitable one.
Dave Kauppi is the editor of The Exit Strategist Newsletter and Managing Partner of MidMarket Capital, providing business broker services to entrepreneurs in information technology, software, and high tech. Visit and review our lists of buyers and sellers. The firm counsels clients in the areas of M&A, sales, valuations, “Smart Equity Capital Raises” and revenue enhancement.
avoid, common, company, Information, looking, mistakes, sell, some, Technology
This entry was posted by mosotech on July 4, 2010 at 11:20 am, and is filed under Information Technology.
Business Seller Financing « Next News
Business Seller Financing « Next News
Seller financing
A seller that is willing to accept terms will usually have a different price for a financed deal versus cash only deal. If the buyer is asking for terms, then their negotiating position is weaker than if they were paying the cash out price in full. It does not matter to the seller if some of this money is from a loan from another source.
If terms, using the seller, are the only way the deal can be floated, then this will take some serious discussion as to length of time and the amount of the loan. The balance will come from money the buyer has access to. The purchase price of a seller-financed purchase can carry a premium of 40 to 60% more than the cash price. It is obviously in the buyers interest to get the money elsewhere so that the cash only price can be met.
This large variance in price makes for spirited negotiating and leaves a great deal of room to come up with a deal. This is where a third party like a business broker is very useful as they have been through this stage of a sale many times. A broker would have more experience at this deal making than either the buyer or the seller in most business sales.
Third party financing
If the company being purchased has a solid financial history that can be documented by a CPA or a business attorney, then it may be possible to get some financing from a bank or a private lending group. The buyer would also have to have a very good credit rating, as the loan will be made to the buyer and the business with both responsible for the loan.
A private lending group may be a little easier to get a loan from, but the interest rate would probably be higher.
It may be possible to get the needed money from relatives or friends in order to make the purchase. In any event is it worth trying all avenues to get the needed funds. The worst that can happen is the answer is no and the deal cannot be made.
Other possible money sources
It may be possible for the buyer to become a majority partner for a time with the old owner in order to make the sale. All of the business liabilities would be the new owners problem, but the old owner could be a participant in the business until it is paid in full. This would be a tricky negotiation, but it could be pulled off with a motivated seller.
One source that may have real possibilities is the use of angel financing. This is money put up by an investor or investor group to help a company with good prospects grow. The buyer would be advised to see if this is a possibility as there are many advantages to this way of raising money. The best part being that the money does not have to be paid off until the company is sold or taken public. If the company has prospect like this due to an invention or a new product, then it is possible to attract some attention.
Caveats for both the buyer and the seller
Any financing that is arranged to make the purchase must be based on reasonable growth for the foreseeable future and not a huge increase in business. If the increase does turn out to be better than expected, the buyer will be able to retire the debt sooner. But, the buyer should not count on this in order to make the payments. The payment needs to be structured using conservative projections for the businesss future sales and profit. Any other scheme could be destined to failure from the get go. A payment plan that is based on pie in the sky will work to the buyers detriment and the seller will end up with a repossessed business that could be harmed by a desperate owner. This would be a very bad arrangement for all concerned.
The secret is to come up with a plan that will work if everything stays exactly the same. If the business has a steady flow of cash over time, then it is likely that this will continue into the future. This plan will lend itself to completion that is in every ones best interest.
All business deals are unique
Almost all sales of a business are unique and require a different approach in order to pull the sale off. Fixed multipliers are just guidelines to come up with an asking price and are not set in stone. Subjective values of businesses are the norm and may well be why a pro needs to be brought in to evaluate the businesss value. This is the key to future financing whether it is the seller that makes the loan or another party. If the business is one of a kind it is even more difficult to come up with an asking price. In this case it is even more important to hire a certified business broker Find a business broker near you. Putting a value on an existing business is part real numbers and part a skillful art. At least the pro has some idea of where to start when coming up with a price.
Conclusions
Early in the discussion of the sale of the business, the air should be cleared as to where the purchase money is coming from or if the buyer is going to need to use financing to make the purchase.
The seller needs to let if be known if they are willing to accept terms or finance part of the purchase price. If they are looking for an all cash deal, then this should be stated also.
Laying out the cards early lets both parties know if they should continue the discussion or move on. Structuring a business purchase is all about factual discussions and obtaining the pertinent information. Honest disclosure will move the deal along faster if the discussion is acceptable from the beginning.
If the seller and the buyer are still interested at this point, then further discussions could be held with the hopes of finding an agreement that works for both. Since terms are part of most deals, this is not usually an obstacle. If there were no seller financing then many deals would never be finished as other financing would not be available. As it turns out this is the grease that makes deals slide together and become a win-win situation.
Tags: Business, Financing, Seller
This entry was posted on Saturday, July 3rd, 2010 at 8:16 pm and is filed under Finance.
Seller financing
A seller that is willing to accept terms will usually have a different price for a financed deal versus cash only deal. If the buyer is asking for terms, then their negotiating position is weaker than if they were paying the cash out price in full. It does not matter to the seller if some of this money is from a loan from another source.
If terms, using the seller, are the only way the deal can be floated, then this will take some serious discussion as to length of time and the amount of the loan. The balance will come from money the buyer has access to. The purchase price of a seller-financed purchase can carry a premium of 40 to 60% more than the cash price. It is obviously in the buyers interest to get the money elsewhere so that the cash only price can be met.
This large variance in price makes for spirited negotiating and leaves a great deal of room to come up with a deal. This is where a third party like a business broker is very useful as they have been through this stage of a sale many times. A broker would have more experience at this deal making than either the buyer or the seller in most business sales.
Third party financing
If the company being purchased has a solid financial history that can be documented by a CPA or a business attorney, then it may be possible to get some financing from a bank or a private lending group. The buyer would also have to have a very good credit rating, as the loan will be made to the buyer and the business with both responsible for the loan.
A private lending group may be a little easier to get a loan from, but the interest rate would probably be higher.
It may be possible to get the needed money from relatives or friends in order to make the purchase. In any event is it worth trying all avenues to get the needed funds. The worst that can happen is the answer is no and the deal cannot be made.
Other possible money sources
It may be possible for the buyer to become a majority partner for a time with the old owner in order to make the sale. All of the business liabilities would be the new owners problem, but the old owner could be a participant in the business until it is paid in full. This would be a tricky negotiation, but it could be pulled off with a motivated seller.
One source that may have real possibilities is the use of angel financing. This is money put up by an investor or investor group to help a company with good prospects grow. The buyer would be advised to see if this is a possibility as there are many advantages to this way of raising money. The best part being that the money does not have to be paid off until the company is sold or taken public. If the company has prospect like this due to an invention or a new product, then it is possible to attract some attention.
Caveats for both the buyer and the seller
Any financing that is arranged to make the purchase must be based on reasonable growth for the foreseeable future and not a huge increase in business. If the increase does turn out to be better than expected, the buyer will be able to retire the debt sooner. But, the buyer should not count on this in order to make the payments. The payment needs to be structured using conservative projections for the businesss future sales and profit. Any other scheme could be destined to failure from the get go. A payment plan that is based on pie in the sky will work to the buyers detriment and the seller will end up with a repossessed business that could be harmed by a desperate owner. This would be a very bad arrangement for all concerned.
The secret is to come up with a plan that will work if everything stays exactly the same. If the business has a steady flow of cash over time, then it is likely that this will continue into the future. This plan will lend itself to completion that is in every ones best interest.
All business deals are unique
Almost all sales of a business are unique and require a different approach in order to pull the sale off. Fixed multipliers are just guidelines to come up with an asking price and are not set in stone. Subjective values of businesses are the norm and may well be why a pro needs to be brought in to evaluate the businesss value. This is the key to future financing whether it is the seller that makes the loan or another party. If the business is one of a kind it is even more difficult to come up with an asking price. In this case it is even more important to hire a certified business broker Find a business broker near you. Putting a value on an existing business is part real numbers and part a skillful art. At least the pro has some idea of where to start when coming up with a price.
Conclusions
Early in the discussion of the sale of the business, the air should be cleared as to where the purchase money is coming from or if the buyer is going to need to use financing to make the purchase.
The seller needs to let if be known if they are willing to accept terms or finance part of the purchase price. If they are looking for an all cash deal, then this should be stated also.
Laying out the cards early lets both parties know if they should continue the discussion or move on. Structuring a business purchase is all about factual discussions and obtaining the pertinent information. Honest disclosure will move the deal along faster if the discussion is acceptable from the beginning.
If the seller and the buyer are still interested at this point, then further discussions could be held with the hopes of finding an agreement that works for both. Since terms are part of most deals, this is not usually an obstacle. If there were no seller financing then many deals would never be finished as other financing would not be available. As it turns out this is the grease that makes deals slide together and become a win-win situation.
Tags: Business, Financing, Seller
This entry was posted on Saturday, July 3rd, 2010 at 8:16 pm and is filed under Finance.
A Business Broker Can Help You Get the Best Deal When You Are Planning To Sell Your Business « Dior Handbags Online
A Business Broker Can Help You Get the Best Deal When You Are Planning To Sell Your Business « Dior Handbags Online
04 Jul 2010 at 08:17
theobald
Uncategorized
A business broker is a firm or a person who assists buying and selling process of small businesses. If you are planning to sell your business, the right business broker can help you get the right price for your business of which it is worth.
A business broker is much more than just a middleman. Apart from exposing you to the vast pool of potential buyers of your business, most brokers also help in facilitating various transactions involved in the buying-selling process. Selling any business is a complex process and is extremely difficult to be carried out own your own.
Taking professional help will let you concentrate on your business till it is completely sold, while the broker will be involved in searching the right buyer for you. This will help to get rid of a lot of unnecessary worries.
Here are some reasons, why you should hire a business broker, if you are serious on putting your business for sale:
The know-how of the market and current worth of a business is crucial before you try to sell your business. Business brokers are usually quite knowledgeable in this area and can usually derive an appreciably accurate value of your online business.
Business brokers know how to package your business the right way and present it in a manner that would attract the buyers.
The database maintained by business brokers make it easier for you to find the potential buyers. If you find a cheap listing in the business for sale records of their database, a lot of buyers would be able to find you, if they are searching for something similar to what your business has to offer.
Confidentiality is one of the most important aspects that a business broker provides to its client, so that the present scenario of the business won't be affected and the rivals and competitors of the enterprise don't come to know that the business is for sale.
Business brokers are well equipped with the skills of converting seekers into buyers. For an individual it is very difficult to create competition among potential business buyers and competition is what fetches the best price in most cases.
The whole process, as we all know is quite complicated and many a times requires compromises on the sides of both the parties. A business broker acts as an intermediary and makes sure that best deal occurs between the two.
04 Jul 2010 at 08:17
theobald
Uncategorized
A business broker is a firm or a person who assists buying and selling process of small businesses. If you are planning to sell your business, the right business broker can help you get the right price for your business of which it is worth.
A business broker is much more than just a middleman. Apart from exposing you to the vast pool of potential buyers of your business, most brokers also help in facilitating various transactions involved in the buying-selling process. Selling any business is a complex process and is extremely difficult to be carried out own your own.
Taking professional help will let you concentrate on your business till it is completely sold, while the broker will be involved in searching the right buyer for you. This will help to get rid of a lot of unnecessary worries.
Here are some reasons, why you should hire a business broker, if you are serious on putting your business for sale:
The know-how of the market and current worth of a business is crucial before you try to sell your business. Business brokers are usually quite knowledgeable in this area and can usually derive an appreciably accurate value of your online business.
Business brokers know how to package your business the right way and present it in a manner that would attract the buyers.
The database maintained by business brokers make it easier for you to find the potential buyers. If you find a cheap listing in the business for sale records of their database, a lot of buyers would be able to find you, if they are searching for something similar to what your business has to offer.
Confidentiality is one of the most important aspects that a business broker provides to its client, so that the present scenario of the business won't be affected and the rivals and competitors of the enterprise don't come to know that the business is for sale.
Business brokers are well equipped with the skills of converting seekers into buyers. For an individual it is very difficult to create competition among potential business buyers and competition is what fetches the best price in most cases.
The whole process, as we all know is quite complicated and many a times requires compromises on the sides of both the parties. A business broker acts as an intermediary and makes sure that best deal occurs between the two.
How To Buy A Business | Internet 9 Blog's
How To Buy A Business | Internet 9 Blog's
July 4th, 2010 | admin | 0 Comments »
It has been said that owning your own business would be great if you didn’t have to deal with employees or customers. Entrepreneurs often find that the reality of owning their own business is often quite different from what they were originally hoping. In other words, long hours, sleepless nights, stress, employee issues, and extended times of wondering whether things will finally take off. As with most things however, owning your own business is risky, but it can be incredibly rewarding. The knowledge that you can have a direct impact on the direction of the business and that you are building something that will grow, and hopefully outlast you, is very important to most entrepreneurs. The possibility of actually becoming wealthy during the process is often just a bonus.
All that being said, buying a business is not a particularly easy process. It can be difficult to find the perfect business. Due diligence can be cumbersome. Financing in these conditions is going to difficult to arrange, and the transition from the previous owner to the new owner is fraught with challenges. That being said, there are 3 key things to keep in mind as during a the business purchase process.
Finding the Perfect Business. There are numerous ways to go about searching for businesses that are for sale. There are several sites that operate like a multiple listing service where sellers can list their business and buyers can scroll through and sort according to various criteria to find the businesses they need. As an example, take a look at http://www.businesstradeboard.com.
Determining the Value of the Business. Generally, the seller will have some idea in their mind as to what they want to sell the business for. However, it is important to keep in mind that there may be a big discrepancy between the price that a seller wants for the business, and what it is actually worth to a buyer. If the buyer is viewing the business as an investment, then the value to them is determined by not only what they think the business will generate financially, but that also needs to be compared with what other opportunities the buyer has for their money. In other word, other businesses that may have more potential. The result is that the value to a buyer is actually a number that goes up or down depending on where else the buyer could put their money. Finalizing on an agreed value with the seller is generally a negotiation that can take some time.
Closing the Deal. There are innumerable details that most be covered during the closing process. Whether it be the final letter of intent, due diligence, accounting review, financing, or the final legal closing process, there are numerous ways for things get off the tracks during this final step.
Not only can a business broker be of invaluable assistance to make sure that things are dealt with accordingly, but they can also be a good sounding board to make sure that you are actually doing what you should be doing. Many buyers use business brokers to find them a business, but there is nothing wrong with actually leaning on a broker or advisor who has been through the process many times before to make sure that things move along, obstacles to closing are removed, and the process is actually enjoyable.
Scott Larson has been a corporate finance consultant for the last 13 years. His specific area of expertise is assisting small to medium sized companies raise growth capital, complete acquisitions, or in leverage shareholder or management buyouts. He also owns http://www.businesstradeboard.com
Tags: Business
July 4th, 2010 | admin | 0 Comments »
It has been said that owning your own business would be great if you didn’t have to deal with employees or customers. Entrepreneurs often find that the reality of owning their own business is often quite different from what they were originally hoping. In other words, long hours, sleepless nights, stress, employee issues, and extended times of wondering whether things will finally take off. As with most things however, owning your own business is risky, but it can be incredibly rewarding. The knowledge that you can have a direct impact on the direction of the business and that you are building something that will grow, and hopefully outlast you, is very important to most entrepreneurs. The possibility of actually becoming wealthy during the process is often just a bonus.
All that being said, buying a business is not a particularly easy process. It can be difficult to find the perfect business. Due diligence can be cumbersome. Financing in these conditions is going to difficult to arrange, and the transition from the previous owner to the new owner is fraught with challenges. That being said, there are 3 key things to keep in mind as during a the business purchase process.
Finding the Perfect Business. There are numerous ways to go about searching for businesses that are for sale. There are several sites that operate like a multiple listing service where sellers can list their business and buyers can scroll through and sort according to various criteria to find the businesses they need. As an example, take a look at http://www.businesstradeboard.com.
Determining the Value of the Business. Generally, the seller will have some idea in their mind as to what they want to sell the business for. However, it is important to keep in mind that there may be a big discrepancy between the price that a seller wants for the business, and what it is actually worth to a buyer. If the buyer is viewing the business as an investment, then the value to them is determined by not only what they think the business will generate financially, but that also needs to be compared with what other opportunities the buyer has for their money. In other word, other businesses that may have more potential. The result is that the value to a buyer is actually a number that goes up or down depending on where else the buyer could put their money. Finalizing on an agreed value with the seller is generally a negotiation that can take some time.
Closing the Deal. There are innumerable details that most be covered during the closing process. Whether it be the final letter of intent, due diligence, accounting review, financing, or the final legal closing process, there are numerous ways for things get off the tracks during this final step.
Not only can a business broker be of invaluable assistance to make sure that things are dealt with accordingly, but they can also be a good sounding board to make sure that you are actually doing what you should be doing. Many buyers use business brokers to find them a business, but there is nothing wrong with actually leaning on a broker or advisor who has been through the process many times before to make sure that things move along, obstacles to closing are removed, and the process is actually enjoyable.
Scott Larson has been a corporate finance consultant for the last 13 years. His specific area of expertise is assisting small to medium sized companies raise growth capital, complete acquisitions, or in leverage shareholder or management buyouts. He also owns http://www.businesstradeboard.com
Tags: Business
Sunday, July 4, 2010
Healthcare Information Technology – Business Valuation | MoSo Technology Blog
Healthcare Information Technology – Business Valuation | MoSo Technology Blog
One of the most challenging aspects of selling a healthcare information technology company is coming up with a business valuation. Sometimes the valuations provided by the market (translation – a completed transaction) defy all logic. In other industry segments there are some pretty handy rules of thumb for valuation metrics. In one industry it may be 1 X Revenue, in another it could be 7.5 X EBITDA.
Since it is critical to our business to help our healthcare information technology clients maximize their business selling price, I have given this considerable thought. Why are some of these software company valuations so high? It is because of the profitability leverage of technology. A simple example is what is Microsoft’s incremental cost to produce the next copy of Office Professional? It is probably $1.20 for three CD’s and 80 cents for packaging. Let’s say the license cost is $400. The gross margin is north of 99%. That does not happen in manufacturing or services or retail or most other industries.
One problem in selling a small healthcare technology company is that they do not have any of the brand name, distribution, or standards leverage that the big companies possess. So, on their own, they cannot create this profitability leverage. The acquiring company, however, does not want to compensate the small seller for the post acquisition results that are directly attributable to the buyer’s market presence. This is what we refer to as the valuation gap.
What we attempt to do is to help the buyer justify paying a much higher price than a pre-acquisition financial valuation of the target company. In other words, we want to get strategic value for our seller. Below are the factors that we use in our analysis:
1. Cost for the buyer to write the code internally – Many years ago, Barry Boehm, in his book, Software Engineering Economics, developed a constructive cost model for projecting the programming costs for writing computer code. He called it the COCOMO model. It was quite detailed and complex, but I have boiled it down and simplified it for our purposes. We have the advantage of estimating the “projects” retrospectively because we already know the number of lines of code comprising our client’s products. In general terms he projected that it takes 3.6 person months to write one thousand SLOC (source lines of code). So if you looked at a senior software engineer at a $70,000 fully loaded compensation package writing a program with 15,000 SLOC, your calculation is as follows – 15 X 3.6 = 54 person months X $5,800 per month = $313,200 divided by 15,000 = $20.88/SLOC.
Before you guys with 1,000,000 million lines of code get too excited about your $20.88 million business value, there are several caveats. Unfortunately the market does not care and will not pay for what it cost you to develop your product. Secondly, this information is designed to help us understand what it might cost the buyer to develop it internally so that he starts his own build versus buy analysis. Thirdly, we have to apply discounts to this analysis if the software is three generations old legacy code, for example. In that case, it is discounted by 90%. You are no longer a technology sale with high profitability leverage. They are essentially acquiring your customer base and the valuation will not be that exciting.
If, however, your application is a brand new application that has legs, start sizing your yacht. Examples of this might be a click fraud application, Pay Pal, or Internet Telephony. The second high value platform would be where your software technology “leap frogs” a popular legacy application. An example of this is when we sold a company that had completely rewritten their legacy management platform in Microsoft .Net. They leap frogged the dominant player in that space that was supporting multiple second generation solutions. Our client became a compelling strategic acquisition. Fast forward one year and I hear the acquirer is selling one of these $100,000 systems per week. Now that’s leverage!
2. Most acquirers could write the code themselves, but we suggest they analyze the cost of their time to market delay. Believe me, with first mover advantage from a competitor or, worse, customer defections, there is a very real cost of not having your product today. We were able to convince one buyer that they would be able to justify our seller’s entire purchase price based on the number of client defections their acquisition would prevent. As it turned out, the buyer had a huge install base and through multiple prior acquisitions was maintaining six disparate software platforms to deliver essentially the same functionality.
This was very expensive to maintain and they passed those costs on to their disgruntled install base. The buyer had been promising upgrades for a few years, but nothing was delivered. Customers were beginning to sign on with their major competitor. Our pitch to the buyer was to make this acquisition, demonstrate to your client base that you are really providing an upgrade path and give notice of support withdrawal for 4 or 5 of the other platforms. The acquisition was completed and, even though their customers that were contemplating leaving did not immediately upgrade, they did not defect either. Apparently the devil that you know is better than the devil you don’t in the world of healthcare information technology.
3. Another arrow in our valuation driving quiver for our sellers is we restate historical financials using the pricing power of the brand name acquirer. We had one client that was a small healthcare IT company that had developed a fine piece of software that compared favorably with a large, publicly traded company’s solution. Our product had the same functionality, ease of use, and open systems platform, but there was one very important difference. The end-user customer’s perception of risk was far greater with the little IT company that could be “out of business tomorrow.” We were literally able to double the financial performance of our client on paper and present a compelling argument to the big company buyer that those economics would be immediately available to him post acquisition. It certainly was not GAP Accounting, but it was effective as a tool to drive transaction value.
4. Financials are important so we have to acknowledge this aspect of buyer valuation as well. We generally like to build in a baseline value (before we start adding the strategic value components) of 2 X contractually recurring revenue during the current year. So, for example, if the company has monthly maintenance contracts of $100,000 times 12 months = $1.2 million X 2 = $2.4 million as a baseline company value component. Another component we add is for any contracts that extend beyond one year. We take an estimate of the gross margin produced in the firm contract years beyond year one and assign a 5 X multiple to that and discount it to present value.
Let’s use an example where they had 4 years remaining on a services contract and the last 3 years were $200,000 per year in revenue with approximately 50% gross margin. We would take the final tree years of $100,000 annual gross margin and present value it at a 5% discount rate resulting in $265,616. This would be added to the earlier 2 X recurring year 1 revenue from above. Again, this financial analysis is to establish a baseline, before we pile on the strategic value components.
5. We try to assign values for miscellaneous assets that the seller is providing to the buyer. Don’t overlook the strategic value of Blue Chip Accounts. Those accounts become a platform for the buyer’s entire product suite being sold post acquisition into an “installed account.” It is far easier to sell add-on applications and products into an existing account than it is to open up that new account. These strategic accounts can have huge value to a buyer.
6. Finally, we use a customer acquisition cost model to drive value in the eyes of a potential buyer. Let’s say that your sales person at 100% of Quota earns total salary and commissions of $125,000 and sells 5 net new accounts. That would mean that your base customer acquisition cost per account was $25,000. Add a
20% company overhead for the 85 accounts, for example, and the company value, using this methodology would be $2,550,000.
7. Our final valuation component is what we call the defensive factor. This is very real in the healthcare information technology arena. What is the value to a large firm of preventing his competitor from acquiring your technology and improving their competitive position in the marketplace. One of our clients had an outcomes database and nurse staffing software algorithm. The owner was the recognized expert in this area and had industry credibility. This was a small add on application to two large industry players’ integrated hospital applications suite. This module was viewed as providing a slight features advantage to the company that could integrate it with their main systems. The selling price for one of these major software systems to a hospital chain was often more than $50 million. The value paid for our client was determined, not by the financial performance of our client, but by the competitive edge they could provide post acquisition. Our client did very well on her company sale.
After reading this you may be saying to yourself, come on, this is a little far fetched. These components do have real value, but that value is open to a broad interpretation by the marketplace. We are attempting to assign metrics to a very subjective set of components. The buyers are smart, and experienced in the M&A process and quite frankly, they try to deflect these artistic approaches to driving up their financial outlay. The best leverage point we have is that those buyers know that we are presenting the same analysis to their competitors and they don’t know which component or components of value that we have presented will resonate with their competition. In the final analysis, we are just trying to provide the buyers some reasonable explanation for their board of directors to justify paying 8 X revenues for an acquisition.
Dave Kauppi is the editor of The Exit Strategist Newsletter and Managing Partner of MidMarket Capital, representing owners in the sale healthcare and technology based businesses. Visit and review our lists of buyers and sellers. The firm counsels clients in the areas of M&A, sales, valuation of intellectual property, “Smart Equity Capital Raises” and revenue enhancement.
business, Healthcare, Information, Technology, Valuation
One of the most challenging aspects of selling a healthcare information technology company is coming up with a business valuation. Sometimes the valuations provided by the market (translation – a completed transaction) defy all logic. In other industry segments there are some pretty handy rules of thumb for valuation metrics. In one industry it may be 1 X Revenue, in another it could be 7.5 X EBITDA.
Since it is critical to our business to help our healthcare information technology clients maximize their business selling price, I have given this considerable thought. Why are some of these software company valuations so high? It is because of the profitability leverage of technology. A simple example is what is Microsoft’s incremental cost to produce the next copy of Office Professional? It is probably $1.20 for three CD’s and 80 cents for packaging. Let’s say the license cost is $400. The gross margin is north of 99%. That does not happen in manufacturing or services or retail or most other industries.
One problem in selling a small healthcare technology company is that they do not have any of the brand name, distribution, or standards leverage that the big companies possess. So, on their own, they cannot create this profitability leverage. The acquiring company, however, does not want to compensate the small seller for the post acquisition results that are directly attributable to the buyer’s market presence. This is what we refer to as the valuation gap.
What we attempt to do is to help the buyer justify paying a much higher price than a pre-acquisition financial valuation of the target company. In other words, we want to get strategic value for our seller. Below are the factors that we use in our analysis:
1. Cost for the buyer to write the code internally – Many years ago, Barry Boehm, in his book, Software Engineering Economics, developed a constructive cost model for projecting the programming costs for writing computer code. He called it the COCOMO model. It was quite detailed and complex, but I have boiled it down and simplified it for our purposes. We have the advantage of estimating the “projects” retrospectively because we already know the number of lines of code comprising our client’s products. In general terms he projected that it takes 3.6 person months to write one thousand SLOC (source lines of code). So if you looked at a senior software engineer at a $70,000 fully loaded compensation package writing a program with 15,000 SLOC, your calculation is as follows – 15 X 3.6 = 54 person months X $5,800 per month = $313,200 divided by 15,000 = $20.88/SLOC.
Before you guys with 1,000,000 million lines of code get too excited about your $20.88 million business value, there are several caveats. Unfortunately the market does not care and will not pay for what it cost you to develop your product. Secondly, this information is designed to help us understand what it might cost the buyer to develop it internally so that he starts his own build versus buy analysis. Thirdly, we have to apply discounts to this analysis if the software is three generations old legacy code, for example. In that case, it is discounted by 90%. You are no longer a technology sale with high profitability leverage. They are essentially acquiring your customer base and the valuation will not be that exciting.
If, however, your application is a brand new application that has legs, start sizing your yacht. Examples of this might be a click fraud application, Pay Pal, or Internet Telephony. The second high value platform would be where your software technology “leap frogs” a popular legacy application. An example of this is when we sold a company that had completely rewritten their legacy management platform in Microsoft .Net. They leap frogged the dominant player in that space that was supporting multiple second generation solutions. Our client became a compelling strategic acquisition. Fast forward one year and I hear the acquirer is selling one of these $100,000 systems per week. Now that’s leverage!
2. Most acquirers could write the code themselves, but we suggest they analyze the cost of their time to market delay. Believe me, with first mover advantage from a competitor or, worse, customer defections, there is a very real cost of not having your product today. We were able to convince one buyer that they would be able to justify our seller’s entire purchase price based on the number of client defections their acquisition would prevent. As it turned out, the buyer had a huge install base and through multiple prior acquisitions was maintaining six disparate software platforms to deliver essentially the same functionality.
This was very expensive to maintain and they passed those costs on to their disgruntled install base. The buyer had been promising upgrades for a few years, but nothing was delivered. Customers were beginning to sign on with their major competitor. Our pitch to the buyer was to make this acquisition, demonstrate to your client base that you are really providing an upgrade path and give notice of support withdrawal for 4 or 5 of the other platforms. The acquisition was completed and, even though their customers that were contemplating leaving did not immediately upgrade, they did not defect either. Apparently the devil that you know is better than the devil you don’t in the world of healthcare information technology.
3. Another arrow in our valuation driving quiver for our sellers is we restate historical financials using the pricing power of the brand name acquirer. We had one client that was a small healthcare IT company that had developed a fine piece of software that compared favorably with a large, publicly traded company’s solution. Our product had the same functionality, ease of use, and open systems platform, but there was one very important difference. The end-user customer’s perception of risk was far greater with the little IT company that could be “out of business tomorrow.” We were literally able to double the financial performance of our client on paper and present a compelling argument to the big company buyer that those economics would be immediately available to him post acquisition. It certainly was not GAP Accounting, but it was effective as a tool to drive transaction value.
4. Financials are important so we have to acknowledge this aspect of buyer valuation as well. We generally like to build in a baseline value (before we start adding the strategic value components) of 2 X contractually recurring revenue during the current year. So, for example, if the company has monthly maintenance contracts of $100,000 times 12 months = $1.2 million X 2 = $2.4 million as a baseline company value component. Another component we add is for any contracts that extend beyond one year. We take an estimate of the gross margin produced in the firm contract years beyond year one and assign a 5 X multiple to that and discount it to present value.
Let’s use an example where they had 4 years remaining on a services contract and the last 3 years were $200,000 per year in revenue with approximately 50% gross margin. We would take the final tree years of $100,000 annual gross margin and present value it at a 5% discount rate resulting in $265,616. This would be added to the earlier 2 X recurring year 1 revenue from above. Again, this financial analysis is to establish a baseline, before we pile on the strategic value components.
5. We try to assign values for miscellaneous assets that the seller is providing to the buyer. Don’t overlook the strategic value of Blue Chip Accounts. Those accounts become a platform for the buyer’s entire product suite being sold post acquisition into an “installed account.” It is far easier to sell add-on applications and products into an existing account than it is to open up that new account. These strategic accounts can have huge value to a buyer.
6. Finally, we use a customer acquisition cost model to drive value in the eyes of a potential buyer. Let’s say that your sales person at 100% of Quota earns total salary and commissions of $125,000 and sells 5 net new accounts. That would mean that your base customer acquisition cost per account was $25,000. Add a
20% company overhead for the 85 accounts, for example, and the company value, using this methodology would be $2,550,000.
7. Our final valuation component is what we call the defensive factor. This is very real in the healthcare information technology arena. What is the value to a large firm of preventing his competitor from acquiring your technology and improving their competitive position in the marketplace. One of our clients had an outcomes database and nurse staffing software algorithm. The owner was the recognized expert in this area and had industry credibility. This was a small add on application to two large industry players’ integrated hospital applications suite. This module was viewed as providing a slight features advantage to the company that could integrate it with their main systems. The selling price for one of these major software systems to a hospital chain was often more than $50 million. The value paid for our client was determined, not by the financial performance of our client, but by the competitive edge they could provide post acquisition. Our client did very well on her company sale.
After reading this you may be saying to yourself, come on, this is a little far fetched. These components do have real value, but that value is open to a broad interpretation by the marketplace. We are attempting to assign metrics to a very subjective set of components. The buyers are smart, and experienced in the M&A process and quite frankly, they try to deflect these artistic approaches to driving up their financial outlay. The best leverage point we have is that those buyers know that we are presenting the same analysis to their competitors and they don’t know which component or components of value that we have presented will resonate with their competition. In the final analysis, we are just trying to provide the buyers some reasonable explanation for their board of directors to justify paying 8 X revenues for an acquisition.
Dave Kauppi is the editor of The Exit Strategist Newsletter and Managing Partner of MidMarket Capital, representing owners in the sale healthcare and technology based businesses. Visit and review our lists of buyers and sellers. The firm counsels clients in the areas of M&A, sales, valuation of intellectual property, “Smart Equity Capital Raises” and revenue enhancement.
business, Healthcare, Information, Technology, Valuation
Saturday, July 3, 2010
The Important Role Of A Business Broker
The Important Role Of A Business Broker
By: David Williams 2
He or she will typically act as an intermediary between the seller of a business and other parties who are interested in purchasing a small business.
As time has gone on and the United States economy has taken a dive, many small business owners have been forced to either sell their business or look for other work. However, not all news is bad news. As a matter of fact, there are certain areas of the country where small businesses are thriving and business owners are actually looking to expand their companies beyond the scope of where they currently are located. To this end, the area of Raleigh, North Carolina in particular has had a mass appeal to those who live in other areas of the country such as New York and Connecticut.
Because the businesses in the North Carolina area seem to be thriving, there are many people who have been relocating their businesses as well as their families to the Raleigh, Durham neighborhood. That said, one of the first things that business owners occupy themselves with is hiring a Raleigh business agent.
When hiring a business broker in Raleigh or in any other part of the country, it is important that you find someone who is local to the area and who has a proven track record of success. Locality is especially important because this person will know the area as well as what the market is like for that particular area. The next thing that you will want to make sure of is the business dealers certifications. For example, with a Raleigh business broker, you will want to ask as well as see proof that they are certified by the IBBA, ABBA and/or M&A Source.
Most (though not all) professional business agents will be people just like yourself who have owned and operated their own businesses and will be able to offer you sound advice on selling your business, what to expect throughout the selling process as well as information on expanding your business (should that apply). Know that business dealers are in the business of understanding all of the complexities that go into operating a business as well as how businesses in your niche and in your geographic area are valued.
Article Source: http://www.articlesnatch.com
About the Author:
Raleigh Business Broker
Business Broker Raleigh
Tags: Raleigh Business Broker
Read more: http://www.articlesnatch.com/Article/The-Important-Role-Of-A-Business-Broker/1297522#ixzz0sfxB9v6E
Under Creative Commons License: Attribution No Derivatives
By: David Williams 2
He or she will typically act as an intermediary between the seller of a business and other parties who are interested in purchasing a small business.
As time has gone on and the United States economy has taken a dive, many small business owners have been forced to either sell their business or look for other work. However, not all news is bad news. As a matter of fact, there are certain areas of the country where small businesses are thriving and business owners are actually looking to expand their companies beyond the scope of where they currently are located. To this end, the area of Raleigh, North Carolina in particular has had a mass appeal to those who live in other areas of the country such as New York and Connecticut.
Because the businesses in the North Carolina area seem to be thriving, there are many people who have been relocating their businesses as well as their families to the Raleigh, Durham neighborhood. That said, one of the first things that business owners occupy themselves with is hiring a Raleigh business agent.
When hiring a business broker in Raleigh or in any other part of the country, it is important that you find someone who is local to the area and who has a proven track record of success. Locality is especially important because this person will know the area as well as what the market is like for that particular area. The next thing that you will want to make sure of is the business dealers certifications. For example, with a Raleigh business broker, you will want to ask as well as see proof that they are certified by the IBBA, ABBA and/or M&A Source.
Most (though not all) professional business agents will be people just like yourself who have owned and operated their own businesses and will be able to offer you sound advice on selling your business, what to expect throughout the selling process as well as information on expanding your business (should that apply). Know that business dealers are in the business of understanding all of the complexities that go into operating a business as well as how businesses in your niche and in your geographic area are valued.
Article Source: http://www.articlesnatch.com
About the Author:
Raleigh Business Broker
Business Broker Raleigh
Tags: Raleigh Business Broker
Read more: http://www.articlesnatch.com/Article/The-Important-Role-Of-A-Business-Broker/1297522#ixzz0sfxB9v6E
Under Creative Commons License: Attribution No Derivatives
Business Valuation Tips Before Selling a Business | Free Financial Information
Business Valuation Tips Before Selling a Business | Free Financial Information
July 3rd, 2010 | Author: admin
Before you embark on selling a business you should consider the variables in your industry that most impact business valuation. For most small businesses, it is usually increasing revenue, profit and margins. There are other real issues to consider though that can have a real impact on a business’s valuation. Before you list your business for sale please take a hard look to see if you have done everything you can to maximize its valuation and if there are any ‘quick fixes’ that you can undertake to assist you. All too often, business owners decide that selling a business is what they want (or need) to do and rush too quickly into the process.
Some issues to think about when selling a business:
How do the financials present? One of the first things that a potential business buyer will inquire about is the financial performance of the business. In most cases a buyer will be looking for typical things like increasing sales, profitability and improving margins over time. This is not always the scenario for all businesses though. We are not suggesting that you alter the financial results of the business in any way but it would be advisable to do some analysis in order to properly tell the story of the business and detail its past performance. For instance, if sales have risen only moderately during the past 2 years, is there a reason behind this? Perhaps a key supplier went on strike or perhaps you re-tooled your business to launch a new product or service? A buyer will certainly do their own analysis of the financial results of the business but try to mitigate any possible unwarranted ‘red flags’ by doing some initial analysis of your own in order to paint an accurate picture of your company. This is something that a business broker can help you with.
What condition is your business in? By this we mean the physical shape it is in. A clean, tidy and well organized business has a distinct advantage over a similar business for sale that is not. Take the time to organize your premises. This will significant help you in selling a business.
Is your equipment in working order? If you are selling a business that requires machinery to operate please ensure that it is working properly and that it is serviced. Broken machinery is a red flag to buyers.
Are your books organized? Do you have accountant prepared financial statements? Do you have everything in place that a business buyer will ask for eventually (such as income tax returns, Ontario retail sales tax returns, bank statements, AP and AR aging schedules, inventory lists, equipment lists, employee information like job descriptions, and so on). A well organized seller is a positive sign for any business buyer.
Are you ready for the transition? While you may hold the perspective that you are selling a business, the buyer is mentally preparing to buy a business and embark on a new journey. He or she will be thinking about running the business after the close. Offering support after the transaction will assist you in the sales process and potentially impact the valuation. Try to think about how you can best do this. Perhaps a 2 – 3 week training period makes sense? Perhaps you can properly document important operational issues to pass on to the new owner after the business sells. Planning ahead to assist a business buyer in the transition will go a long way in helping you to sell your company.
Selling a business is a process that requires careful planning and a sound strategy. The above points are but a few of the issues you will encounter when you start the selling process. Talk to a business broker to learn more about the business sales process.
Posted in Financial Tips | Tags: Before, Business, selling, Tips, valuation
July 3rd, 2010 | Author: admin
Before you embark on selling a business you should consider the variables in your industry that most impact business valuation. For most small businesses, it is usually increasing revenue, profit and margins. There are other real issues to consider though that can have a real impact on a business’s valuation. Before you list your business for sale please take a hard look to see if you have done everything you can to maximize its valuation and if there are any ‘quick fixes’ that you can undertake to assist you. All too often, business owners decide that selling a business is what they want (or need) to do and rush too quickly into the process.
Some issues to think about when selling a business:
How do the financials present? One of the first things that a potential business buyer will inquire about is the financial performance of the business. In most cases a buyer will be looking for typical things like increasing sales, profitability and improving margins over time. This is not always the scenario for all businesses though. We are not suggesting that you alter the financial results of the business in any way but it would be advisable to do some analysis in order to properly tell the story of the business and detail its past performance. For instance, if sales have risen only moderately during the past 2 years, is there a reason behind this? Perhaps a key supplier went on strike or perhaps you re-tooled your business to launch a new product or service? A buyer will certainly do their own analysis of the financial results of the business but try to mitigate any possible unwarranted ‘red flags’ by doing some initial analysis of your own in order to paint an accurate picture of your company. This is something that a business broker can help you with.
What condition is your business in? By this we mean the physical shape it is in. A clean, tidy and well organized business has a distinct advantage over a similar business for sale that is not. Take the time to organize your premises. This will significant help you in selling a business.
Is your equipment in working order? If you are selling a business that requires machinery to operate please ensure that it is working properly and that it is serviced. Broken machinery is a red flag to buyers.
Are your books organized? Do you have accountant prepared financial statements? Do you have everything in place that a business buyer will ask for eventually (such as income tax returns, Ontario retail sales tax returns, bank statements, AP and AR aging schedules, inventory lists, equipment lists, employee information like job descriptions, and so on). A well organized seller is a positive sign for any business buyer.
Are you ready for the transition? While you may hold the perspective that you are selling a business, the buyer is mentally preparing to buy a business and embark on a new journey. He or she will be thinking about running the business after the close. Offering support after the transaction will assist you in the sales process and potentially impact the valuation. Try to think about how you can best do this. Perhaps a 2 – 3 week training period makes sense? Perhaps you can properly document important operational issues to pass on to the new owner after the business sells. Planning ahead to assist a business buyer in the transition will go a long way in helping you to sell your company.
Selling a business is a process that requires careful planning and a sound strategy. The above points are but a few of the issues you will encounter when you start the selling process. Talk to a business broker to learn more about the business sales process.
Posted in Financial Tips | Tags: Before, Business, selling, Tips, valuation
Do Your Own Business Valuation – Part 3: Quantifying Business Returns | Formula One Racing
Do Your Own Business Valuation – Part 3: Quantifying Business Returns | Formula One Racing
July 2nd, 2010 | Author: admin
The basic concept of business value is that the future benefits (returns) of owning a company must be adjusted (discounted) for the risks associated with owning the company. The sales or earnings of a company are typically used to represent the benefits (returns). Multiples and rates are used to represent the risks. The basic formula of business value is – Value = Returns/Risks. This article will address how to quantify the returns of a business.
Earning Capacity
There are many benefits to owning a business (financial and non-financial). Non-financial benefits like: being your own boss, controlling your own destiny, prestige, etc. are impossible to quantify, so valuation focuses on the financial rewards. The returns from a company are generally measured by its ability to generate earnings (earning capacity). The value of a company that does not have earning capacity comes primarily from its tangible assets.
Earning capacity is not just the net profits from financial statements and tax returns. Net profits must be adjusted to compensate for accounting principles, tax regulations, and related party dealings that do not accurately described what really happened. Cash flow is considered a purer form of earnings because it is not affected by accounting principles and tax regulations. For these reasons cash flow is the preferred measure of earning capacity for valuation purposes.
The earnings of a small, owner-operated company must do two things. First it must provide adequate compensation to the owner for the services he or she renders to the company. Any remaining cash flow or earnings represent the earning capacity of the company.
Many small businesses don’t earn enough to provide the owner with adequate compensation. Some of these companies have existed for decades, have established customer bases, and have brilliant reputations. Their owners have worked hard to build the company to its current state, but they lack one vital thing – earning capacity. Without it these small companies have small or no goodwill value. Essentially these companies have only been providing a job for the owner. Intangible assets like loyal, repeat customers and a fantastic reputation have small value if the owners can’t convert them into earning capacity.
Earning capacity is not made in one year. A company must build a history of generating earnings consistently. Trends should be analyzed and unusual or non-recurring events should be eliminated. These events can sometimes be the accumulated effect of incremental changes, so don’t be too quick to factor them out. The earning capacity of a business can be used to value the entire entity or just its intangible (goodwill) value depending on the valuation method used. A three to five year period is often used to analyze earning capacity. A straight or weighted average of earnings over the period is often used in the valuation formula.
Past vs. Future Performance
Since the value of a company is based on future benefits, it would seem reasonable to use projections of future performance as the basis for a valuation. Using projections pose a number of practical problems. First, most small companies don’t normally prepare projections. It is impractical to prepare formal projections for a valuation. Doing quick and dirty projections to save time and money makes a valuation based on questionable earnings, so why bother? Second, projections tend to be unrealistic because they make assumptions that may not occur or have different outcomes. Because there are no excellent ways to estimate future results, assumptions are often based on arbitrary changes to prior year numbers. Finally, since every number is made from assumptions, it is subject to question or manipulation.
Past performance may not reflect future results, but at least it is based on actual numbers that can be traced back to financial statements or tax returns. Historical data can be adjusted to reflect expected changes in future performance. These adjustments should be limited to results expected from actions that were already implemented, are ongoing, or imminent. One of the goals of a valuation is to be able to clarify and justify the results. Data from past performance is much simpler to justify than projected data.
Conclusion
A key component in the business valuation formula is the expected returns from a company. Those returns are quantified by determining the earning capacity of the company. The next step to complete the equation is to quantify the risks associated with owning the company.
Posted in F1 News | Tags: business, part, Quantifying, Returns, Valuation
July 2nd, 2010 | Author: admin
The basic concept of business value is that the future benefits (returns) of owning a company must be adjusted (discounted) for the risks associated with owning the company. The sales or earnings of a company are typically used to represent the benefits (returns). Multiples and rates are used to represent the risks. The basic formula of business value is – Value = Returns/Risks. This article will address how to quantify the returns of a business.
Earning Capacity
There are many benefits to owning a business (financial and non-financial). Non-financial benefits like: being your own boss, controlling your own destiny, prestige, etc. are impossible to quantify, so valuation focuses on the financial rewards. The returns from a company are generally measured by its ability to generate earnings (earning capacity). The value of a company that does not have earning capacity comes primarily from its tangible assets.
Earning capacity is not just the net profits from financial statements and tax returns. Net profits must be adjusted to compensate for accounting principles, tax regulations, and related party dealings that do not accurately described what really happened. Cash flow is considered a purer form of earnings because it is not affected by accounting principles and tax regulations. For these reasons cash flow is the preferred measure of earning capacity for valuation purposes.
The earnings of a small, owner-operated company must do two things. First it must provide adequate compensation to the owner for the services he or she renders to the company. Any remaining cash flow or earnings represent the earning capacity of the company.
Many small businesses don’t earn enough to provide the owner with adequate compensation. Some of these companies have existed for decades, have established customer bases, and have brilliant reputations. Their owners have worked hard to build the company to its current state, but they lack one vital thing – earning capacity. Without it these small companies have small or no goodwill value. Essentially these companies have only been providing a job for the owner. Intangible assets like loyal, repeat customers and a fantastic reputation have small value if the owners can’t convert them into earning capacity.
Earning capacity is not made in one year. A company must build a history of generating earnings consistently. Trends should be analyzed and unusual or non-recurring events should be eliminated. These events can sometimes be the accumulated effect of incremental changes, so don’t be too quick to factor them out. The earning capacity of a business can be used to value the entire entity or just its intangible (goodwill) value depending on the valuation method used. A three to five year period is often used to analyze earning capacity. A straight or weighted average of earnings over the period is often used in the valuation formula.
Past vs. Future Performance
Since the value of a company is based on future benefits, it would seem reasonable to use projections of future performance as the basis for a valuation. Using projections pose a number of practical problems. First, most small companies don’t normally prepare projections. It is impractical to prepare formal projections for a valuation. Doing quick and dirty projections to save time and money makes a valuation based on questionable earnings, so why bother? Second, projections tend to be unrealistic because they make assumptions that may not occur or have different outcomes. Because there are no excellent ways to estimate future results, assumptions are often based on arbitrary changes to prior year numbers. Finally, since every number is made from assumptions, it is subject to question or manipulation.
Past performance may not reflect future results, but at least it is based on actual numbers that can be traced back to financial statements or tax returns. Historical data can be adjusted to reflect expected changes in future performance. These adjustments should be limited to results expected from actions that were already implemented, are ongoing, or imminent. One of the goals of a valuation is to be able to clarify and justify the results. Data from past performance is much simpler to justify than projected data.
Conclusion
A key component in the business valuation formula is the expected returns from a company. Those returns are quantified by determining the earning capacity of the company. The next step to complete the equation is to quantify the risks associated with owning the company.
Posted in F1 News | Tags: business, part, Quantifying, Returns, Valuation
Business Valuation Mistakes
Business Valuation Mistakes
In a constantly fluctuating business market, it is very important for a business enterprise to get a regular business valuation. Having a current business valuation helps to determine what a company is worth today. Besides, it informs the owner about the financial condition of the firm and assists in quick decisions on buying, selling and merger of businesses.
Business valuations are normally prepared by professionals such as business appraisers, business brokers, certified public accountants, financial analysts and economists. Chances of business valuation mistakes are more if business valuation reports are prepared by an inexpert. Mistakes in business valuation reports may affect the accuracy, validity, credibility and reliability of the business appraisal. So, a professional with knowledge, experience and proper accreditations in business valuation must be approached.
The use of a business valuation method that is not accepted by courts is a quite common error in the valuation of businesses. This mistake is frequent with appraisers who are unfamiliar with the practice of family law. Discounted future earnings method, acceptable as a valuation method for certain types of businesses, is not used in valuing a professional practice. Hence, discounted future earnings method can be considered as another error.
Business valuation mistakes may also include the use of valuation methods that do not consider all of the business assets. An appraiser relying on a particular business valuation method should ensure that the selected method can consider all the assets of the business. Application of value multiples to the wrong income stream, omission of certain assets or liabilities and omission of minority discounts may result in business valuation mistakes. Failure to mention the date of the valuation and the date prepared is also considered as a mistake in business valuation reports.
Failure to define the purpose of the valuation and earnings are other common business valuation mistakes. Apart from the above, omission of unique events and failure to adjust goodwill to risk factors earnings may also invite mistakes during the preparation of a business valuation report.
By: Eric Morris
About the Author:
Business Valuation provides detailed information on Business Valuation, Small Business Valuation, Business Valuation Software, Business Valuation Services and more. Business Valuation is affiliated with Home Business Opportunity [http://www.i-BusinessOpportunity.com].
business marketing strategies
Tags: Business Assets, Business Enterprise, Business Valuations, Financial Analysts, Types Of Businesses.
Filed under Business by admin on Jul 2nd, 2010. #
In a constantly fluctuating business market, it is very important for a business enterprise to get a regular business valuation. Having a current business valuation helps to determine what a company is worth today. Besides, it informs the owner about the financial condition of the firm and assists in quick decisions on buying, selling and merger of businesses.
Business valuations are normally prepared by professionals such as business appraisers, business brokers, certified public accountants, financial analysts and economists. Chances of business valuation mistakes are more if business valuation reports are prepared by an inexpert. Mistakes in business valuation reports may affect the accuracy, validity, credibility and reliability of the business appraisal. So, a professional with knowledge, experience and proper accreditations in business valuation must be approached.
The use of a business valuation method that is not accepted by courts is a quite common error in the valuation of businesses. This mistake is frequent with appraisers who are unfamiliar with the practice of family law. Discounted future earnings method, acceptable as a valuation method for certain types of businesses, is not used in valuing a professional practice. Hence, discounted future earnings method can be considered as another error.
Business valuation mistakes may also include the use of valuation methods that do not consider all of the business assets. An appraiser relying on a particular business valuation method should ensure that the selected method can consider all the assets of the business. Application of value multiples to the wrong income stream, omission of certain assets or liabilities and omission of minority discounts may result in business valuation mistakes. Failure to mention the date of the valuation and the date prepared is also considered as a mistake in business valuation reports.
Failure to define the purpose of the valuation and earnings are other common business valuation mistakes. Apart from the above, omission of unique events and failure to adjust goodwill to risk factors earnings may also invite mistakes during the preparation of a business valuation report.
By: Eric Morris
About the Author:
Business Valuation provides detailed information on Business Valuation, Small Business Valuation, Business Valuation Software, Business Valuation Services and more. Business Valuation is affiliated with Home Business Opportunity [http://www.i-BusinessOpportunity.com].
business marketing strategies
Tags: Business Assets, Business Enterprise, Business Valuations, Financial Analysts, Types Of Businesses.
Filed under Business by admin on Jul 2nd, 2010. #
Friday, July 2, 2010
Selling a Business? Do You Know It's Value? | Franchise Money Maker
Selling a Business? Do You Know It's Value? | Franchise Money Maker
July 1st, 2010 · No Comments
This article is written and owned by Jimmy Lewin
Whether you are still working on a business plan for your start up or have been running your company for decades, you like most entrepreneurs probably have a dollar value in mind at which point you plan to sell your business. Isn’t that one of the main reasons why we take the risk of starting our own business - to eventually sell it for big bucks?
But, before you put a down payment on that new yacht or buy that vacation home on a far away island, be sure you have a firm understanding on how your company will be valued by the marketplace. The value you place on your business may not be what the market values it at, and that may leave your checking account a bit lighter than you expected. However, understanding the value of your company today will enable you to make adjustments in your business plan to ensure you hit your valuation number when you are ready to sell to the highest bidder.
Valuing a business is always an imprecise science, even with large-cap public companies. For example - Is the value of a large public company based on its market price? It’s book value? It’s potential worth if broken into parts that have more perceived value than the whole? The answer is that there are many ways to determine the value of a company.
Perhaps the best way to understand the “value” of any business, large or small, is to look at who’s doing the valuing and for what purpose. For example, we’ll wager that you would value your family business differently for estate purposes versus a sale of the business.
Regardless of how a business is valued, there are both quantitative and qualitative factors that play a role in a comprehensive appraisal. Many of the elements that go into a business valuation can be classified in three categories:
• “Hard numbers” such as historical profits, assets, cash flow and liabilities are always important in determining the worth of a business.
• “Soft figures” such as income and cash flow projections can be very important to a buyer or investor interested in the company
• “Intangible assets” such as patents, brands, quality or reputation of management, location, recipes, processes, technology, customer lists or goodwill often have a hand in determining the overall value of a business.
There are many reasons to value a business, and “the reason” for the valuation is typically an important factor in deciding how an appraisal will be performed. This is why in many instances, more than one value can be correct.
As indicated above, two of the more common reasons to value a company are for a sale or for estate tax purposes. Other purposes for performing a valuation might include acquiring insurance coverage of various types, attracting an angel or venture capital investor or seeking a credit facility from a bank or finance company. The key considerations that go into any valuation include:
• Company, competitor and industry information. How is your business performing and how does it compare to your competitors? What is the state of your industry? Is your business in a growth industry or a declining one?
• Analysis of historical financial statements. Ratio analysis such as return on equity or gross margin is often helpful.
• Projected financial statements going out three to five years can be particularly significant, especially if they are recast to reflect the business without owner compensation. By recasting statements, the value can be estimated as if the business were under different ownership or managed under different circumstances.
• Using a method of valuation that is appropriate for the purpose of the valuation.
Jimmy Lewin is a Business Plan Coach, Consultant and Writer with BizPlanIt. BizPlanIt is a consulting firm ( http://www.bizplanit.com ) that since 1997 has assisted entrepreneurs and business owners in developing clear, concise and compelling business plans, financial projections and investors presentations that help them achieve their financing and growth goals. BizPlanIt’s Virtual Business Plan ( http://www.bizplanit.com/resources/virtual-business-plan-template.html ) is a unique and free resource that mirrors the major sections of a business plan and provides insight into the fundamentals of writing an effective plan for your company.
Article Source: [http://EzineArticles.com/?Selling-a-Business?-Do-You-Know-Its-Value?&id=4588015] Selling a Business? Do You Know It’s Value?
July 1st, 2010 · No Comments
This article is written and owned by Jimmy Lewin
Whether you are still working on a business plan for your start up or have been running your company for decades, you like most entrepreneurs probably have a dollar value in mind at which point you plan to sell your business. Isn’t that one of the main reasons why we take the risk of starting our own business - to eventually sell it for big bucks?
But, before you put a down payment on that new yacht or buy that vacation home on a far away island, be sure you have a firm understanding on how your company will be valued by the marketplace. The value you place on your business may not be what the market values it at, and that may leave your checking account a bit lighter than you expected. However, understanding the value of your company today will enable you to make adjustments in your business plan to ensure you hit your valuation number when you are ready to sell to the highest bidder.
Valuing a business is always an imprecise science, even with large-cap public companies. For example - Is the value of a large public company based on its market price? It’s book value? It’s potential worth if broken into parts that have more perceived value than the whole? The answer is that there are many ways to determine the value of a company.
Perhaps the best way to understand the “value” of any business, large or small, is to look at who’s doing the valuing and for what purpose. For example, we’ll wager that you would value your family business differently for estate purposes versus a sale of the business.
Regardless of how a business is valued, there are both quantitative and qualitative factors that play a role in a comprehensive appraisal. Many of the elements that go into a business valuation can be classified in three categories:
• “Hard numbers” such as historical profits, assets, cash flow and liabilities are always important in determining the worth of a business.
• “Soft figures” such as income and cash flow projections can be very important to a buyer or investor interested in the company
• “Intangible assets” such as patents, brands, quality or reputation of management, location, recipes, processes, technology, customer lists or goodwill often have a hand in determining the overall value of a business.
There are many reasons to value a business, and “the reason” for the valuation is typically an important factor in deciding how an appraisal will be performed. This is why in many instances, more than one value can be correct.
As indicated above, two of the more common reasons to value a company are for a sale or for estate tax purposes. Other purposes for performing a valuation might include acquiring insurance coverage of various types, attracting an angel or venture capital investor or seeking a credit facility from a bank or finance company. The key considerations that go into any valuation include:
• Company, competitor and industry information. How is your business performing and how does it compare to your competitors? What is the state of your industry? Is your business in a growth industry or a declining one?
• Analysis of historical financial statements. Ratio analysis such as return on equity or gross margin is often helpful.
• Projected financial statements going out three to five years can be particularly significant, especially if they are recast to reflect the business without owner compensation. By recasting statements, the value can be estimated as if the business were under different ownership or managed under different circumstances.
• Using a method of valuation that is appropriate for the purpose of the valuation.
Jimmy Lewin is a Business Plan Coach, Consultant and Writer with BizPlanIt. BizPlanIt is a consulting firm ( http://www.bizplanit.com ) that since 1997 has assisted entrepreneurs and business owners in developing clear, concise and compelling business plans, financial projections and investors presentations that help them achieve their financing and growth goals. BizPlanIt’s Virtual Business Plan ( http://www.bizplanit.com/resources/virtual-business-plan-template.html ) is a unique and free resource that mirrors the major sections of a business plan and provides insight into the fundamentals of writing an effective plan for your company.
Article Source: [http://EzineArticles.com/?Selling-a-Business?-Do-You-Know-Its-Value?&id=4588015] Selling a Business? Do You Know It’s Value?
Business News and Business Products, Services, Reports and Advertising. Business News RSS Feed. » Blog Archive » 5 Tips To Successfully Sell Your Business
Business News and Business Products, Services, Reports and Advertising. Business News RSS Feed. » Blog Archive » 5 Tips To Successfully Sell Your Business
Selling a business you’ve owned and operated and loved like a child is rarely easy. Business ownership includes many practical matters such as providing an income, helping customers, paying your bills on time etc but it also includes many emotions. These include being successfully, being honest, going above and beyond to help customers and employees to name a few. If it’s time for you to sell your business, considering the following will help you be successful.
1. Avoid using high-pressure sales tactics.
Buying and selling a business is a unique set of circumstances. No two transactions are the same. You can never “sell” a business; the buyer has to want to “buy” for reasons that make sense to them. The law recognizes this by defining it as a willing buyer and a willing seller with neither party under any compulsion to close the transaction.
2. Letting negative ideas or emotions get in the way.
There are so many variables when buying or selling a business. Each party needs to navigate through their own practical reasons and then marry those reasons to their own emotions. You cannot make the buyer buy because “this is the best business in the world.” They will buy for their own reasons and generally not communicate these to you; especially while you are still in negotiations.
3. Providing incorrect answers to questions.
Trust is a non negotiable item that can kill or allow a deal to continue. Giving incorrect answers to questions will quickly kill a deal or remove any interest the buyer has in continuing discussions.
4. Trying to sell the business to the wrong buyer.
The rule of thumb is that it takes 10 buyer inquiries to lead to one qualified buyer. When that one qualified buyer reveals itself, work hard to make sure the buyer’s needs are met without giving away all the business secrets.
5. Forgetting that buying a business is a stressful situation for the buyer
Just as it is for the owner selling an entity they have labored, cherished and worried about over the years, the buyer has no history of the business including its employees, landlord, suppliers, banker and any other parties that currently make the business run.
Andrew Rogerson is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include business brokerage; helping owners sell and/or buyers purchase a business. He also provides consulting on purchasing a franchise, certified machinery and equipment appraisals and business valuations. Andrew is a CBI with the International Business Brokers Association and CBB with the California Association of Business Brokers. He also carries a Brokers License from the California Dept. of Real Estate, is a member of the Sacramento Metro Chamber of Commerce and the Sacramento Chair of the California Association of Business Brokers.
This entry was posted on Thursday, July 1st, 2010 at 2:50 am and is filed under Business News.
Selling a business you’ve owned and operated and loved like a child is rarely easy. Business ownership includes many practical matters such as providing an income, helping customers, paying your bills on time etc but it also includes many emotions. These include being successfully, being honest, going above and beyond to help customers and employees to name a few. If it’s time for you to sell your business, considering the following will help you be successful.
1. Avoid using high-pressure sales tactics.
Buying and selling a business is a unique set of circumstances. No two transactions are the same. You can never “sell” a business; the buyer has to want to “buy” for reasons that make sense to them. The law recognizes this by defining it as a willing buyer and a willing seller with neither party under any compulsion to close the transaction.
2. Letting negative ideas or emotions get in the way.
There are so many variables when buying or selling a business. Each party needs to navigate through their own practical reasons and then marry those reasons to their own emotions. You cannot make the buyer buy because “this is the best business in the world.” They will buy for their own reasons and generally not communicate these to you; especially while you are still in negotiations.
3. Providing incorrect answers to questions.
Trust is a non negotiable item that can kill or allow a deal to continue. Giving incorrect answers to questions will quickly kill a deal or remove any interest the buyer has in continuing discussions.
4. Trying to sell the business to the wrong buyer.
The rule of thumb is that it takes 10 buyer inquiries to lead to one qualified buyer. When that one qualified buyer reveals itself, work hard to make sure the buyer’s needs are met without giving away all the business secrets.
5. Forgetting that buying a business is a stressful situation for the buyer
Just as it is for the owner selling an entity they have labored, cherished and worried about over the years, the buyer has no history of the business including its employees, landlord, suppliers, banker and any other parties that currently make the business run.
Andrew Rogerson is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include business brokerage; helping owners sell and/or buyers purchase a business. He also provides consulting on purchasing a franchise, certified machinery and equipment appraisals and business valuations. Andrew is a CBI with the International Business Brokers Association and CBB with the California Association of Business Brokers. He also carries a Brokers License from the California Dept. of Real Estate, is a member of the Sacramento Metro Chamber of Commerce and the Sacramento Chair of the California Association of Business Brokers.
This entry was posted on Thursday, July 1st, 2010 at 2:50 am and is filed under Business News.
Ad me Up before you gogo » Blog Archive » Buy A Business Without Ever Worrying About Overpaying Or Getting Screwed Over By The Seller (Art Hamel)
Ad me Up before you gogo » Blog Archive » Buy A Business Without Ever Worrying About Overpaying Or Getting Screwed Over By The Seller (Art Hamel)
If you’d like a sure-fire way to make sure you never “overpay” for a business you want to buy, then this article contains a simple little “tactic” that can save you a lot of money.
Listen, this will sound very basic but it works: The whole key to making sure you never get taken for a ride on the price when buying a business is to simply take everything the seller says with a grain of salt.
In other words, you simply have to check everything out they give you and verify it. Take nothing on good faith. Do not “trust” the seller, no matter how much he kisses your butt or how “great a guy” he seems to be.
You can verify almost everything simply by bringing in a CPA…and having him (or her) check out the financials from the last four or five years to make sure everything jives with what the seller is saying. Simple? Yes. But buying a business is simple when it comes down to it. It’s all about doing your homework, checking every
thing out and taking your time.
And when you do this you
Tags: aquarium, black, choosing, getting, hamel, httpwwwtropicalfishislandcom, jamieson, overpaying, settlement, their, varieties, white, young
This entry was posted on Thursday, July 1st, 2010 at 3:44 pm and is filed under Uncategorized.
If you’d like a sure-fire way to make sure you never “overpay” for a business you want to buy, then this article contains a simple little “tactic” that can save you a lot of money.
Listen, this will sound very basic but it works: The whole key to making sure you never get taken for a ride on the price when buying a business is to simply take everything the seller says with a grain of salt.
In other words, you simply have to check everything out they give you and verify it. Take nothing on good faith. Do not “trust” the seller, no matter how much he kisses your butt or how “great a guy” he seems to be.
You can verify almost everything simply by bringing in a CPA…and having him (or her) check out the financials from the last four or five years to make sure everything jives with what the seller is saying. Simple? Yes. But buying a business is simple when it comes down to it. It’s all about doing your homework, checking every
thing out and taking your time.
And when you do this you
Tags: aquarium, black, choosing, getting, hamel, httpwwwtropicalfishislandcom, jamieson, overpaying, settlement, their, varieties, white, young
This entry was posted on Thursday, July 1st, 2010 at 3:44 pm and is filed under Uncategorized.
Thursday, July 1, 2010
Planning to Sell a Business | Stock Market News
Planning to Sell a Business | Stock Market News
Many times, business owners make the decision to sell a business and too quickly dive into a listing arrangement without considering all of the consequences.
As a business owner looking to sell a business, here are a couple of issues to keep in mind if you want to sell your company quickly and at a good price.
Deal with a professional
As a business seller it is in your best interest to deal with a business broker, intermediary or specialist that focuses on the selling of businesses. Oftentimes, owners list their companies for sale with an individual who normally focuses on residential real estate and are disappointed when their business doesn’t sell. If you want to sell a business, it’s better to deal with a specialist.
Selling a business requires a unique skill set and the process is much different than selling a piece of real estate. For instance, business sales are usually kept confidential so dealing with a business sales specialist will benefit you by working with a professional that has an existing network of potential buyers interested specifically in businesses for sale. There is also more technical expertise required (example – business valuation for the purpose to sell a business is much different than determining the value for a piece of real estate, the negotiation is usually much more involved, there are typically more deal terms to be negotiated, due diligence must be managed and the overall transition facilitated). If you are looking to sell a business please choose to deal with a professional that specializes in business sales.
Declare your income
Too often, business owners don’t ‘declare’ a portion of their business income in order to have a lower tax bill. This is highly unadvisable. For starters, CCRA would not be too happy if they discovered such activity. Secondly, from a purely economic point of view, it costs you, as a business owner, in the long run when you go to sell a business. For instance, suppose you decide not to declare $10,000 in earnings and keep this instead as cash ‘off the books’. If your overall small business tax rate was 23% you would be saving about $2,300 in taxes. Alternatively, supposing you did declare the full amount you would pay $2,300 in taxes and be left with $7,700 in ‘declared’ income. However, supposing your business was valued at 2x earnings you would be gaining $15,400 in supportable business valuation when the day came to sell the business.
The point is that it may seem appealing in the short-run to cheat and not declare income but it really does pay to be honest. Businesses with undeclared earnings are much more difficult to sell and much more difficult to justify a valuation on. Business buyers always like to see properly documented and supportable earnings.
Do some analysis on your business
When you decide to sell a business, it is important to be able to tell a narrative to potential buyers about your business. Do some analysis and try to anticipate what an interested buyer might ask you. For instance, if profit margins have been decreasing, find out why. If sales have been decreasing, get to the root of it. Perhaps you had a period where you lost a staff member and have since resolved the situation.
Find out the story behind the numbers to paint an accurate picture to a buyer. Remember that no business is perfect and most reasonable buyers don’t expect it to be. Don’t try to gloss over any blemishes your business may have. Be forthright. Buyers expect you to be honest and if you’re not then that would raise a red flag that could potentially de-rail a deal.
Ontario Business Brokers
Business for Sale in Toronto, Hamilton and surrounding areas in southern Ontario, Canada. We are a full service business brokerage here to help you buy or sell a business.
Stock Market News
Tags: Business, Planning, Sell
This entry was posted on Thursday, July 1st, 2010 at 07:17 and is filed under News.
Many times, business owners make the decision to sell a business and too quickly dive into a listing arrangement without considering all of the consequences.
As a business owner looking to sell a business, here are a couple of issues to keep in mind if you want to sell your company quickly and at a good price.
Deal with a professional
As a business seller it is in your best interest to deal with a business broker, intermediary or specialist that focuses on the selling of businesses. Oftentimes, owners list their companies for sale with an individual who normally focuses on residential real estate and are disappointed when their business doesn’t sell. If you want to sell a business, it’s better to deal with a specialist.
Selling a business requires a unique skill set and the process is much different than selling a piece of real estate. For instance, business sales are usually kept confidential so dealing with a business sales specialist will benefit you by working with a professional that has an existing network of potential buyers interested specifically in businesses for sale. There is also more technical expertise required (example – business valuation for the purpose to sell a business is much different than determining the value for a piece of real estate, the negotiation is usually much more involved, there are typically more deal terms to be negotiated, due diligence must be managed and the overall transition facilitated). If you are looking to sell a business please choose to deal with a professional that specializes in business sales.
Declare your income
Too often, business owners don’t ‘declare’ a portion of their business income in order to have a lower tax bill. This is highly unadvisable. For starters, CCRA would not be too happy if they discovered such activity. Secondly, from a purely economic point of view, it costs you, as a business owner, in the long run when you go to sell a business. For instance, suppose you decide not to declare $10,000 in earnings and keep this instead as cash ‘off the books’. If your overall small business tax rate was 23% you would be saving about $2,300 in taxes. Alternatively, supposing you did declare the full amount you would pay $2,300 in taxes and be left with $7,700 in ‘declared’ income. However, supposing your business was valued at 2x earnings you would be gaining $15,400 in supportable business valuation when the day came to sell the business.
The point is that it may seem appealing in the short-run to cheat and not declare income but it really does pay to be honest. Businesses with undeclared earnings are much more difficult to sell and much more difficult to justify a valuation on. Business buyers always like to see properly documented and supportable earnings.
Do some analysis on your business
When you decide to sell a business, it is important to be able to tell a narrative to potential buyers about your business. Do some analysis and try to anticipate what an interested buyer might ask you. For instance, if profit margins have been decreasing, find out why. If sales have been decreasing, get to the root of it. Perhaps you had a period where you lost a staff member and have since resolved the situation.
Find out the story behind the numbers to paint an accurate picture to a buyer. Remember that no business is perfect and most reasonable buyers don’t expect it to be. Don’t try to gloss over any blemishes your business may have. Be forthright. Buyers expect you to be honest and if you’re not then that would raise a red flag that could potentially de-rail a deal.
Ontario Business Brokers
Business for Sale in Toronto, Hamilton and surrounding areas in southern Ontario, Canada. We are a full service business brokerage here to help you buy or sell a business.
Stock Market News
Tags: Business, Planning, Sell
This entry was posted on Thursday, July 1st, 2010 at 07:17 and is filed under News.
Financing and Investing to Buy a Business Without Real Estate | BlogSDN Articles
Financing and Investing to Buy a Business Without Real Estate | BlogSDN Articles
June 30th, 2010 Posted in Business & Finance
When obtaining a business opportunity loan, borrowers will discover that many lenders simply do not provide business loans that do not include real estate as part of the business purchase. There are several other important business financing issues to analyze prior to buying a business without commercial property.
Interest in buying business opportunity investments has improved because of serious problems with residential real estate. However, because there are so many critical differences between financing residential real estate and business financing, it is important for potential business owners to educate themselves before proceeding.
In order to buy a business, a commercial borrower is likely to need business financing. If the business includes commercial real estate, the borrower will need a commercial mortgage. If the business purchase does not involve real estate, a business borrower must use a business opportunity loan.
Unfortunately the availability of business opportunity financing is more restricted than commercial real estate financing. There are also some potential limitations and problems unique to a business opportunity loan, and commercial borrowers should make every effort to avoid these business financing difficulties.
Our goal here is to focus on several financing issues that you should anticipate when commercial real estate is not part of the business purchase. Our suggested approach to business opportunity financing is provided below.
Begin your business opportunity investment financing plans by formulating a realistic assessment of cash available for a down payment and desired maximum business purchase price. A down payment of about 25% is suggested for most business financing situations described here. Usually seller financing is permissible for a portion of the down payment, but a potential buyer generally needs to plan on investing at least 10% of the purchase price from their own funds even if the seller is providing 15% or more.
Because Small Business Administration loans are essential for this kind of financing, you should explore whether you will in fact be able to qualify for these specialized business loans. This step is both important and somewhat complicated, and the involvement of an SBA loan expert is strongly advised. Among the issues to explore are whether collateral is available for SBA financing and how important refinancing is to your overall business opportunity financing process.
It is important to consider the lease terms which are possible. As noted previously, business opportunity financing and investing does not involve the purchase of commercial real estate, so arrangements must be made for a long-term lease. A ten-year maximum loan term is likely, and a shorter financing term will probably be required if the length of the lease is for less than ten years. In other words, with a seven-year lease, the commercial loan is likely to be for seven years, and even with a fifteen-year lease, the commercial financing will probably expire in ten years.
When buying a business, inquire about the possibility of including commercial real estate. With the inclusion of commercial property, you can obtain a longer business loan and the interest rate will be lower. Because the absence of a commercial mortgage can actually be an advantage, the improved terms possible by including real estate should not be looked at in isolation.
Before any offers are made to buy a business investment, borrowers should discuss their financing options with an expert for business opportunity loans. These discussions should include issues such as potential purchase price, down payment possibilities, seller financing, buyer credit scores, tax return requirements and collateral options.
June 30th, 2010 Posted in Business & Finance
When obtaining a business opportunity loan, borrowers will discover that many lenders simply do not provide business loans that do not include real estate as part of the business purchase. There are several other important business financing issues to analyze prior to buying a business without commercial property.
Interest in buying business opportunity investments has improved because of serious problems with residential real estate. However, because there are so many critical differences between financing residential real estate and business financing, it is important for potential business owners to educate themselves before proceeding.
In order to buy a business, a commercial borrower is likely to need business financing. If the business includes commercial real estate, the borrower will need a commercial mortgage. If the business purchase does not involve real estate, a business borrower must use a business opportunity loan.
Unfortunately the availability of business opportunity financing is more restricted than commercial real estate financing. There are also some potential limitations and problems unique to a business opportunity loan, and commercial borrowers should make every effort to avoid these business financing difficulties.
Our goal here is to focus on several financing issues that you should anticipate when commercial real estate is not part of the business purchase. Our suggested approach to business opportunity financing is provided below.
Begin your business opportunity investment financing plans by formulating a realistic assessment of cash available for a down payment and desired maximum business purchase price. A down payment of about 25% is suggested for most business financing situations described here. Usually seller financing is permissible for a portion of the down payment, but a potential buyer generally needs to plan on investing at least 10% of the purchase price from their own funds even if the seller is providing 15% or more.
Because Small Business Administration loans are essential for this kind of financing, you should explore whether you will in fact be able to qualify for these specialized business loans. This step is both important and somewhat complicated, and the involvement of an SBA loan expert is strongly advised. Among the issues to explore are whether collateral is available for SBA financing and how important refinancing is to your overall business opportunity financing process.
It is important to consider the lease terms which are possible. As noted previously, business opportunity financing and investing does not involve the purchase of commercial real estate, so arrangements must be made for a long-term lease. A ten-year maximum loan term is likely, and a shorter financing term will probably be required if the length of the lease is for less than ten years. In other words, with a seven-year lease, the commercial loan is likely to be for seven years, and even with a fifteen-year lease, the commercial financing will probably expire in ten years.
When buying a business, inquire about the possibility of including commercial real estate. With the inclusion of commercial property, you can obtain a longer business loan and the interest rate will be lower. Because the absence of a commercial mortgage can actually be an advantage, the improved terms possible by including real estate should not be looked at in isolation.
Before any offers are made to buy a business investment, borrowers should discuss their financing options with an expert for business opportunity loans. These discussions should include issues such as potential purchase price, down payment possibilities, seller financing, buyer credit scores, tax return requirements and collateral options.
Subscribe to:
Posts (Atom)