Here’s what’s on your mind: How much is my business worth? How can I maximize the value and my return on investment? What makes my business desirable to a buyer?
All good questions – and there are more. Let’s have a look at the factors involved with business valuations and why it’s not as scientific as one might think.
David Braun, president of Maxima Divestitures says:
There are three approaches to the determination for fair market value, the income approach, the asset-based approach and the market approach.
The income approach, the most common approach, is used where the business is a visible going concern. This approach capitalizes an earnings stream into value using a multiple. Income is based on discretionary maintainable income under normal operating conditions excluding person expenses and reflecting salaries for management at market levels.
The asset-based approach is used when there is no expectation that a business interest will include goodwill value and value can be determined by directly assessing the value of the assets.
The market approach is based on value indications from comparable transactions. These value indications can be expressed using earnings or other benchmarks called “rules of thumb” including value as a multiple of sales units of production or number of employees. (end quote)
FACT: what a buyer pays is consistently different from what the business is valued at. So, why bother? Braun simply states, “Knowing the range of value is the first step in understanding what the business could sell for. A valuation educates the seller. It provides a benchmark for comparison purposes and helps prepare the seller for the negotiation process.”
FACT: The business seller has two critical risks: improperly valuing the business and not understanding the buyer’s motivation. Logan Day of Ernst & Young Orenda, corporate finance, suggests, “There’s a risk of engaging a transaction advisory firm that simply applies a rule of thumb to set the asking price without completing a thorough review. That almost always costs the business owner money. Secondly, understanding the buyer, the potential strategic fit and their past deal track record are important factors in getting a deal done.” Day adds, “The best way to avoid these risks is to work with a team that systematically determines the strengths and weaknesses of your company, and benchmarks that information against current market trends to establish an achievable value for your business.”
Braun says, “The selling price for a business can be affected by how the company is presented to the buyer. Buyers are looking for opportunities, but like every business owner, they’re also looking for the pitfalls – where’s the risk?”
Buyers scare pretty easily – surprises found late in the due diligence process can easily kill the deal. Presenting the business in a well-documented manner addresses benefits and risks in a positive fashion – it sets up the opportunity for the seller to get the best possible price for the business.
A good business has hidden assets that increase value. These don’t usually show up on the balance sheet but they contribute to the return on investment for the buyer. These include a strong client list, a seasoned management team, customer loyalty, in-house systems and processes, client satisfaction, patents and more.
But that’s not the end of the story, Maxima clarifies, “The selling price for a business has a lot to do with who’s buying it – what advantages the buyer gains. To get the highest possible price, you must be deliberate in identifying a target list of potential strategic buyers.”
Braun concludes that, “While Maxima focuses on working with clients having sales in the range of $2M to $15M in annual sales, the principals involved in selling any business, large or small are very similar. Business owners who have built up a successful business know their business well – but they may not know the business of selling their business.”
Business owners get a bigger win with a strong coach to help them stickhandle the transaction process. Successful business owners deserve to score a goal for their hard work!
