Business Pricing Issues
|
|
|
The Montana Group: Bullet Points
The Montana Group has for 25+ years represented business owners in selling their businesses.
- Fee only if there is a sale. Success based.
- $400,000,000+ in completed transactions
- Manufacturing, Distribution, Service industries
- Continental USA
- Transaction Range: $5 million to $50 million
- 500+ Buyers in database geared to our market
Due to your industry we have sent you our monthly email newsletter on issues to consider when selling a business. These newsletters are also available on our website. Should you like to discuss further the issue of selling your business, please let me know.
Business Valuation Factors
There are many complex formulas in expensive business valuation software that spit out reams of data on the value of a private business. This data is certainly interesting and can be helpful in determining price expectations but this is an inexact science, at best. While this valuation approach is necessary and helpful when there are estate issues or legal issues such as buy-sell disputes the only answer is that a business is worth what a buyer is willing to pay at the time the business is for sale.
To formulate a ballpark answer to this question the following would be helpful:
- Who is the buyer?
- What is the buyer’s motive?
- What is the buyer’s experience in making acquisitions?
- What is the buyer’s financial strength?
- What is the buyer’s concern with their competition for this purchase?
- The Buyer’s recent acquisition activity in this type of business.
- Are there many similar companies available to purchase?
- What are the future growth opportunities of the company?
- Proprietary products?
- Barrier to entry?
- Management post-sale?
- Is there competition or perceived competition on this acquisition?
Does the business’ representative have a large database of potential acquirers?
Of course, private businesses are not often publicizing their sale price so it’s rare that there is a comparative sale to review. Even if this information were available the question would be does this buyer want to buy another company? Is buyer more or less motivated to buy another company? How about the unsuccessful potential buyers – are they more motivated now to increase their valuation? Comparing a private business’ value to a public company in the same line of business seems a stretch as larger businesses trade at significantly higher multiple and the same can be said for publicly traded ones.
So, the answer…… “you need a good representative to properly present the company to facet of the buyer market that would likely have an interest in the company and wait and see. However, this representative should be able to provide an accurate complimentary valuation range that can be used to determine if the owner is now a seller”, per Emmett Barnes, President of The Montana Group (www.montanagroup.com).
Preparing the Company for Sale
The prudent outlook of the Business Owners:
As is often the case, business owners are totally focused on the constant issues of running their business. However, if they are contemplating the sale of their company it is time well-spent to contemplate their business value in the eyes of the ultimate buyer.
The cash flow that the business generates is KING, as this almost single-handily determines the value. The “almost” comes from other considerations like the balance sheet, the barrier to entry, and growth opportunities … to name a few. Therefore, their cash flow needs boosting, if practical, and this, of course, comes from either increased sales or reduced expenses. The business owner may determine this will require some difficult changes (e.g. termination of an employee, expansion) and prefer that the new owner make the tough decisions. However, it should be understood that the transactional valuation will rarely include savings that have not been reflected on the income statement.
Irreplaceable business owners makes a business much less valuable to a buyer! It is imperative for business owners to understand that if after the sale there is no involvement in the business potential new owners will be concerned with who they will hire to take over. If the buyer is an industry buyer (strategic) there could well be someone within the buyer’s organization who can run the newly acquired company. However, if the buyer is a financial buyer this candidate can be more difficult to locate. Therefore, if the seller has an interest in running the company post-sale or if there is someone within the organization that is either now in-charge or is capable of running the company, then the buyer will more confidently move forward and enhance their valuation.
Growth opportunities that should positively affect the company’s revenue are exciting and powerful. In most cases, the potential buyers are buying based on a value derived from the business’ historical numbers but are using their own projections based on their assumptions for future growth. This growth fuels their optimism about the investment and therefore pushes the value upward. So, expansion opportunities such as additional products, additional sale territory, and additional sale force, as well as, improvement in overhead costs etc result in increased enthusiasm for the potential buyers. Enthusiastic buyers equates to better offers.
Bottom Line: “Business owners should look at their business as they would if they were the buyer so focus on improving the cash flow and be ready to discuss the future growth opportunities”, says Emmett Barnes, President of The Montana Group (www.montanagroup.com).