Are You Emotionally Ready to Sell?

Quite often sellers don’t give much thought to whether or not they are ready to sell. But this can be a mistake. The emotional components of both buying and selling a business are quite significant and should never be overlooked. If you are overly emotional about selling, then this fact can have serious ramifications on your outcomes. Many sellers who are not emotionally ready, will inadvertently take steps that undermine their progress. Selling a business, especially one that you have put a tremendous amount of effort into over a period of years, can be an emotional experience even for those who feel they are more stoic by nature. Before you jump in and put your business up for sale, take a moment and reflect on how the idea of no longer owning your business makes you feel.   Emotional Factor #1 – Employees It is not uncommon for business owners to form friendships and bonds with employees, especially those who have been with them long-term. However, many business … [Read more...]

Business Valuations: Some Difficult Issues

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

A Reasonable Price for Private Companies

What is a reasonable price for private companies? Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their financial issues and other information than the privately-held ones. This makes digging out information for a privately-held company difficult for a prospective purchaser. So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already. Another expert has said that when the seller of a privately-held company decides to sell, there are four estimates of price or value: A value placed on the company by an outside appraiser or expert. This can be either formal or informal. The seller’s “wish price.” This is the price the seller … [Read more...]

Checklist for Valuation

  One of the first things you need to accomplish when you decide to sell your business is a valuation. A valuation will inform you on how to properly price your business depending on multiple factor. Although it is recommended that you hire a business broker or a licensed individual to price your business, below is a checklist for valuation to help you get started: 1. Start with the business –  Value Drivers:  Size, growth rate, management, niche, history –  Value Detractors:  Customer concentration Poor financials Outdated M&E Few assets Lack of agreements with employees, customers, suppliers Poor exit possibilities Small market Potential technology changes Product or service very price sensitive 2. Financial analysis: Market Value – comparables Multiple of Earnings – based on rate of return desired 3. Structure and terms: 100% cash at closing could reduce price 20% 4. Second opinion: Even professionals need a sounding board 5. Indications of … [Read more...]

Closing the Price Gap

  The deal is getting down to the wire, the price differential is close, but the parties are not yet in agreement. Following are some ideas that might get the ball rolling and help bring the parties together and close the price gap: Let the seller retain the real estate and rent it to the buyer, thus reducing the price. The same could be done for major pieces of equipment. Let the seller lease them to the buyer reducing the price. The lease should, however, like most leases, provide for a buyout at the end. Structure a royalty on sales rather than an earnout on gross margins or EBIT. Have the parties create a subsidiary for the fastest growing part of the business in which the buyer and seller share 50/50. Let the buyers acquire 70 percent of the business with the requirement that they purchase 10 percent more each year on the same multiple of EBIT as in the 70 percent sale. Arrange a consulting agreement with the seller to provide additional compensation to be paid … [Read more...]

What is the Value of Your Business? It All Depends.

The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered. Does an owner need to know for estate purposes? Does the bank want to know for lending purposes? Is the owner entertaining bringing in a partner or partners? Is the owner thinking of selling? Is a divorce or partnership dispute occurring? Is a valuation needed for a buy-sell agreement? There are many other reasons why knowing the value of the business may be important. Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. … [Read more...]

Business Valuation: Do the Financials Tell the Whole Story?

Many experts say no! These experts believe that only half of the business valuation should be based on the financials (the number-crunching), with the other half of the business valuation based on non-financial information (the subjective factors). What subjective factors are they referring to?  SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats – the primary factors that make up the subjective, or non-financial, analysis. Below you will find a more detailed look at the areas that help us evaluate a company’s SWOT. Industry Status – A company’s value increases when its associated industry is expanding, and its value decreases in any of the following situations:  its industry is constantly fighting technical obsolescence; its industry involves a commodity subject to ongoing price wars; its industry is severely impacted by foreign competition; or its industry is negatively impacted by governmental policies, controls, or pricing. Geographic Location – A … [Read more...]