Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What's the difference? One can look at the usual checklist for the answer, such as: The Market Management/Employees Uniqueness/Proprietary Systems/Controls Revenue Size Profitability Regional/Global Distribution Capital Equipment Requirements Intangibles (brand/patents/etc.) Growth Rate There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example: Are the company's … [Read more...]
What Are Buyers Looking for in a Company?
It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price. Quality of the Earnings Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be: meeting some new governmental guidelines, paying for a major lawsuit, or adding a new roof on the factory. The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year. These add-backs can inflate the earnings, resulting in a failure to reflect … [Read more...]
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 would really like to receive – best case scenario. The … [Read more...]
Top Ten Mistakes Made By Sellers
Neglecting the day-to-day running of their business with the reasoning that it will sell tomorrow. Starting off with too high a price with the assumption the price can always be reduced. Assuming that confidentiality is a given. Failing to plan ahead to sell / deciding to sell impulsively. Expecting that the buyers will only want to see last year's P&L. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time. Not accepting that the structure of the deal is as important as the price. Trying to win every point of contention. Dragging out the deal and not accepting that time is of the essence. © Copyright 2015 Business Brokerage Press, Inc. Photo Credit: jppi via morgueFile … [Read more...]
Why Sell Your Company?
Selling one's business can be a traumatic and emotional event. In fact, “seller's remorse” is one of the major reasons that deals don't close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them. Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one's business usually indicates that it is time to sell. No one to take over – Sons and daughters can be disenchanted with the family business by the time it's their turn to take over. Family members often wish to move on to their own lives and careers. Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the … [Read more...]
Who Is the Buyer?
Buyers buy a business for many of the same reasons that sellers sell businesses. It is important that the buyer is as serious as the seller when it comes time to purchase a business. If the buyer is not serious, the sale will never close. Here are just a few of the reasons that buyers buy businesses: Laid-off, fired, being transferred (or about to be any of them) Early retirement (forced or not) Job dissatisfaction Desire for more control over their lives Desire to do their own thing A Buyer Profile Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more and more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family … [Read more...]
Buying (or Selling) a Business
The following is some basic information for anyone considering purchasing a business. Is may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become. A Buyer Profile Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business … [Read more...]
Selling Your Business? Expect the Unexpected!
According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling: How much is your time worth? Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a … [Read more...]
Do You Know Your Customers?
It's always nice, when eating at a nice restaurant, for the owner to come up and ask how everything was. That personal contact goes a long way in keeping customers happy – and returning. It seems that customer service is now handled by making a potential customer or client wait on a telephone for what seems like forever, often forcing them to repeatedly listen to a recording saying that the call will be handled in 10 minutes. Small businesses are usually built around personal customer service. If you are a business owner, when is the last time you “worked the floor” or handled the phone, or had lunch with a good customer? Customers and clients like to do business with the owner. Even a friendly “hello” or “nice to see you again” goes a long way in customer relations and service. The importance of knowing your customers and/or clients could actually be extended to suppliers, vendors, and others connected with your business. When is the last time you visited with your banker, … [Read more...]
A Listing Agreement is More than Just a Piece of Paper
In order to sell one’s business using the services of a business broker, a listing agreement is almost always required. For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family. For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds. So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The … [Read more...]