Valuation of a Business Requires Experienced, Professional Help
Businesses do not sell like real estate, using “comps” for the same neighborhood and Multiple Listing Services to establish an asking price. Although data bases do exist for the listing and selling prices for similar types of businesses in the same general area, every business is unique. Rules of thumb may be used, such as multiples of earnings for the business, but they are only approximate. There are many factors that influence the proper valuation of a business. HBSI highly recommends that sellers obtain a professionally prepared valuation. There are two distinct advantages for doing so:
· A professionally prepared valuation provides the seller with an objective, third party evaluation of the worth of the business for pricing purposes
· The valuation can be a useful tool for supporting the asking price for the business and preventing a buyer from making an unrealistically low offer
HBSI works with experienced, proven professional valuation companies and will assist the seller in preparing the data required for the valuation.
Buyers: Four General Types
In preparing to value and sell the business, it is important for the seller to be aware of types of buyers with whom he/she may be dealing. HBSI has experience in dealing with all types of buyers. We will tailor all promotion and marketing efforts for each business in areas where the seller will have the best chance of selling his/her business with the best price and terms.
1. The Strategic Acquirer
These are typically the best buyers because they are well financed and will buy at a premium. Typically public or large private companies, their decision to buy usually revolves around considerations of economies of scale, new channels of distribution, new technologies or other integration considerations. To be attractive to a Strategic Acquirer, your company should fit most, if not all, of the following criteria:
- Sales in excess of $10 million
- Proprietary product or process
- Unique market presence or share
- Synergistic fit with the acquirer
- Suitable management willing to stay
If your company does fit into this category, HBSI has the channels and contacts available and experience to find a strategic acquirer of your business.
2. Sophisticated Buyers
There are two distinct types of Sophisticated Acquirers and the acquisition criteria they use are as follows:
Private Equity Group (PEG)
- Revenues from $10 million upwards to $100 million
- Earnings of $1 million for platform acquisitions
- Earnings of $250k minimum for add on acquisitions
- Investment of considerable cash or equity
- Pay 3 to 6 times earnings
High Net Worth Individuals
- Revenues from $2 million upwards to $20 million
- Looking for a business can expand exponentially
- Expect 6 figure future earnings
- Expect to leverage a part of the purchase
- Expect the Seller to finance part of the buy
- Pay 3 to 5 times earnings
HBSI has the tools and experience to identify and market to this group as well.
3. Main Street Buyer
These are the most common buyers of Main Street and Upper Main Street businesses. They tend to focus on present and past earnings and will not typically pay a price based on future earnings. They are buying a source of income and the sense of satisfaction of being their own boss. They will consider a price fair if the transaction meets the following criteria:
- A living wage typically commensurate with the initial investment
- A modest return on the cash investment, willing to pay 1.5 to 3 times earnings
- SBA or Seller financing
- A good fit with their skills and the opportunity to make the business better
Good rapport between the buyer and the seller is typically important in these transactions. HBSI is experienced in bringing buyers and sellers together in an atmosphere of trust and good will.
4. Buyers in the same Industry or Market
Sellers often think that they are the ones best qualified to sell their business because they know already everyone in their industry. They even consider offering their business to their competition. However, industry buyers are usually only willing to buy the assets without consideration for good will and other factors. Their primary motive may be to eliminate competition. Their offer typically includes only:
- Liquidation value
- Book value
- Adjusted book value
HBSI will typically recommend these as buyers of last resort. The other types of buyers described above are much more desirable to a seller.
An important part of offering your business for sale is understanding what it is worth. HBSI can assist you with a professional business valuation. The price offered will be influenced by the type of buyer making the offer. HBSI will ensure that your business is presented to the best class(es) of buyers.
The Business Valuation Process
Every business is unique. There are many factors that go into the professional valuation of a business. The valuation will also be influenced by the target group or groups of potential buyers discussed above.
The three most common approaches used are as follows:
1. Asset Approach
This approach values only the assets of the business. The value of the assets of a business are, however, not always easy to ascertain. For example, the value of the assets as stated on the Balance Sheet -- "Book Value" - is almost always not the true value of the assets in the marketplace. If a business is being liquidated and the assets must be sold quickly, then Book Value is meaningless. But if the assets can be sold over a course of several months, then the value of these assets is closer to their fair market value (FMV). For most sales, the assets are valued at FMV, defined as the price that a reasonable buyer would pay a reasonable seller if neither were under undue pressure to buy or sell. The asset approach usually is not the best indicator of the true value of the business unless it is asset intensive, marginally profitable or losing money,.
2. Income Approach
This approach uses one or more methods to determine the value based upon the anticipated benefits of business ownership. Simply stated, the income approach determines the value of the anticipated stream of business income. The key factors are what are the earnings and what is the discount rate or capitalization rate applied to the earnings? Earnings, as discussed elsewhere, are the adjusted profits of the business. Most professional valuations use one of two types of earnings: 1) SDCF (Seller's Discretionary Cash) is a direct measurement of the true bottom line benefit of owning a small business. SDCF includes the owner's salary or take home compensation; 2) EBITDA (Earnings before interest, taxes, depreciation, and amortization) differs from SDCF in one key area; it includes compensation for management. Discount or Capitalization Rates can vary greatly by the type of business, type of prospective purchaser and the overall risk of the continuity of the income stream. Some potential areas of risk can be the size of the company, competitive forces, barriers to entry, growth rates, quality of management, etc.
3. Market Approach
The market approach estimates the value of a business using data bases to compare it to similar businesses that have been sold recently in the same region. However, every business is unique. This is the least accurate approach and is usually used only to ballpark the value of a business.
HBSI assists sellers in securing a valuation that will be of most benefit in helping to see the business. The valuation gives the seller a benchmark from which to establish a selling price. It also provides more credence with the buyer that he/she is paying a fair price for the business.
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