What is the value of my business?

Questions answered in the post:  How does Business Valuation for Merger and Acquisition and Business Sale Purposes work?  What about business valuation for succession planning and exit strategies?  What is the likely sales price of my business?  How do I determine an asking price for my business sale?

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

The first question most business owners ask me is “what is the value of my business?” It does not matter if the business is a construction company, a plumbing service company, an engineering firm, manufacturer, business services retail or other.  The answer is the same.

In simple  terms, the value of the business is the sum of all the benefits that accrue to the owner during and after ownership.  Clearly, many of the benefits of owning a business are not income related.  Most business owners have a pride of ownership beyond their income and they appreciate the challenges and flexibility that come from owning their own business.

Valuations are done for many reasons: for estate and tax purposes, in divorce settlements, to resolve disputes between partners, to name a few.  Sometimes they are needed to prepare for a market sale.  Every valuation takes the uncertainty that is part of business into account.  There are numerous assumptions that can radically change the final valuation figure or range.  Often whether the valuator wants to find a high or a low figure in the range of possible valuations will greatly determine the outcome.    This is why divorcing spouses can have such radically varying valuations for the same business.

When you are anticipating selling your business you should obtain a valuation to plan appropriately and, in some cases, to use as a negotiating tool.  For smaller businesses your broker should be able to prepare a simple valuation.  For larger businesses it is worth having a valuation properly pared by a valuation professional.  This person may be independent, work with your accountant or be part of the broker’s firm.

 Greg’s Tip:  Have both a valuation for business sale purposes and a business analysis (a business improvement strategic plan) performed for the purpose of maximizing your sales value and after tax returns.  Ideally this will be performed 3 to 5 years before a sale.  While it may seem extravagant, this investment will produce the highest internal rate of return of any investment you make. 

Explaining a detailed valuation is beyond the scope of this blog.  Technically, a valuation involves either determining  that past cash flows fully reflect the future, or projecting out the future cash flows based on past history and likely forecasts, and then discounting this cash flow to find the present value.

Over the next month or so we will add postings giving rules of thumb and other simplified valuation techniques that may assist you in estimating your business value.  Just a word of caution, do not go to market based on rules of thumb and estimates.  Have a proper valuation done appropriate for your size and type of business.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

How to Sell Your Business – Business Buyers; What about Competitors?

When looking to sell your business it is important to identify who your proper buyer is likely to be.  Business brokers and business intermediaries for main street and middle market businesses generally know what type of buyer will pay the most.  Many sellers think of competitors when they go to sell.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Competitors.  Some businesses have natural efficiencies that come with size.  For instance, route businesses such as package delivery become more and more profitable the shorter the route between stops.  This creates a logical Buyer in a competitor because of the potential for synergy and economies of scale.  Location dependent businesses buy competitors to obtain more quality locations.  These Competitors are also known as Strategic Buyers.

Competitors may be the only Buyers for large complex businesses, especially those with low profits, because they can determine if “their way” of performing will increase the operating results of the existing cash flow.  Yet, if there are not natural synergies, competitors do not typically pay the highest price for most well run businesses because they already have a business system and are not willing to pay a premium to learn yours.

Truck Repair Blues

A large specialty truck sale and repair service company has seven locations in four states.  The owner had started the business twenty years earlier out of his spare bedroom.  He had grown the business to $45,000,000 in sales by under pricing and out hustling competitors every day.  The business is extremely complex with multiple product lines including new product sales, product service, and a startup division which is venturing into a completely new market.  He has a competent but homegrown management staff who do not have the ability to run the company for a purely financial Buyer.  The Seller has forbidden the intermediaries trying to make a market for his business to contact competitors and suppliers for fear that word will get out and it will hurt his business.  Even after explaining how the list can be very carefully tailored to prospective Buyers with capital, a strongly expressed interest, and a past history of making discreet purchases, the Seller still will not allow the intermediaries to approach anyone in the business.  No sale is possible under these conditions. 

Related businesses, not competitors.  For example, a graphics company might buy a printing business.  Or a concrete pipe company might buy a trucking company.  This concept is known as bounce-back synergy.  In these cases, one business is very dependent on the other.  This is a longer shot than many of the others but they do occur.  It also lessens the risk of giving all your detailed information to a competitor who never intends to buy you.

In all cases when thinking about selling your business think about who will pay the most for your business and how do you best interest them in your business.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955

gcaruso@harvestbusiness.com

www.harvestbusiness.com

How to Sell Your Business – Who is my Buyer? For Main Street Businesses

What every business broker, business intermediary, and business appraiser knows is that in order to get the highest price when you want to sell your business you must identify and attract the best, most motivated and qualified buyer for your business.  This will vary with your size, profitability, industry and so on. Below are the buyer types for smaller businesses with a value of up to $3 to $5 Million.

Remember to make your business as desirable as possible for your ‘best’ buyer.  This may involve physical changes to the business over time.  It may involve providing financing or training that is a little out of the norm.  It certainly will involve looking at the prospective buyers of your business as you would your regular customers and make your product (the total business) as great as possible.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Below, we are outlining how we classify buyer groups.  As with any grouping of people some people will fit several groups and some will not fit any.

Tradesmen With a Windfall.  All joking aside, lottery winnings and more often inheritances have been the down payment on more than one business.  Sometimes equity in a home serves the same purpose.  It is very difficult for working people to save enough money to buy a business.  Their preference is usually for smaller businesses that involve a trade such as small plumbing shops, auto shops, machine shops, etc.  Often the owner is the primary manager and there are a few other mechanics but little support staff.  Buyers tend to know the trade and be comfortable that they can do the work if all else fails.  If the prospect has a little more money and a business background they may buy a little larger business.  Typical transactions range from $50,000 to $500,000

New Americans.  This Buyer group tends to be buying jobs.  They are often overqualified but have language barriers, and they typically buy businesses such as delis, convenience stores, and gas-and-go stations.

Corporate Sales & Middle Managers.  They are similar to the tradesmen but they tend to buy a little larger business.  They buy profitable businesses and are interested in proven results: they do not want to re-invent the wheel.   They tend to buy businesses with two or three office support staff in addition to the production and sales people who know how to ‘run the shop’ when the owner is out.  They will often pay the best price because they are paying for the complete system including customer lists and goodwill.  Typical transactions range from $350,000 to $1,500,000.

Key Employees.  Key employees are often the best Buyers because they really know the business and they often have demonstrated experience running it.  They have a vested interest and have already bought into solving the problems and living with the risk inherent in that business.  However, many times key employees do not have the cash and the access to capital to buy the business.  They also may not have the energy or interest in being an owner.  Many owners have assumed their 60 year old managers would want to buy them out only to learn that the managers intend to retire the day the owner does.

Remember, in all cases, identify your best buyer.  Improve and market your business to attract that buyer.  If you are unsure about your best buyer do not hesitate to call or email. and have a confidential conversation.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

How to Sell Your Business – Who Is My Buyer? For Middle Market Businesses

What every business broker and business appraiser knows is that in order to get the highest price when you want to sell your business you must identify and attract the best, most motivated and qualified buyer for your business.  This will vary with your size, profitability, industry and so on.  This post is one of two identifying buyer groups.  One of the things a knowledgeable broker and exit planner does is help you identify your business buyer and what they specifically want accurately.  This article contains important general information and buyer groups for lower middle market businesses generally with a value of $3 million or above.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Lets start with a story:

When I was young, I would go fishing with my Dad.  We had fun but Dad knew nothing about fishing.  When I got a little older I went fishing with my brother’s boxing coach, Bud.  Bud was a short, stocky man with a brain tumor – the result of more than four hundred amateur and semi-pro fights.  That probably explained most of the crazy things in his life.  But Bud knew how to fish.

He told us that he would fly shotgun in small airplanes looking for unfished ponds on farms.  (This was long before Google Earth).  Then he would go ask the owner if he could fish their pond.  Inevitably they would tell him that there were no fish in that pond but go ahead.  Bud had his special lures and eighty percent of the time he caught tons of fish.  The first time I went fishing with Bud, we caught so many fish so fast it felt like I was cheating!  Bud caught fish by fishing in ponds that had tons of fish because no one had fished them in years.  Bud knew how to find fish and, with his special lures, he caught them.

What does this have to do with selling a business?  The most important thing you have to do is to figure out who and where your fish (Buyers) are.  These are the people who are likely to be the most interested in your business and therefore the people who will pay you the most.  Who these people are will vary with what you have to sell and what you want to accomplish.  Below, we summarize the major groups and when they are likely to be the best Buyers. We address how to find them later in the book.

Remember to make your business as desirable as possible for your ‘best’ buyer.  This may involve physical changes to the business over time.  It may involve providing financing or training that is a little out of the norm.  It certainly will involve looking at the prospective buyers of your business as you would your regular customers and make your product (the total business) as great as possible.

Below, we are outlining how we classify buyer groups.  As with any grouping of people some people will fit several groups and some will not fit any.

Synergistic Buyers.  These are companies that are in the same or a related business that will have sales or operational advantages allowing them to pay more for the business than what is justified by the current selling business cash flow alone.  The classic example of this is a delivery business that buys a competitor with the same territory.  Now instead of making an average delivery for 10 miles of driving they might make one every 5 miles greatly reducing the average cost per delivery.   The key with synergistic buyers is they CAN pay more if they wish.  They tend to be very picky about what and when they buy.  You must understand what they are looking for and when they are buying be willing to sell then.

Private Equity Groups (PEGS).  These are investment groups that are looking for growth oriented opportunities.  Generally they want $3 million of EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization – a measurement of cash flow potential).  They want a good management structure in place and they want to be about to multiply the company size and resell the company in 5 to 10 years.  Usually the first company they buy in an industry is called a “platform” and is a larger business.  Often after they acquire a platform they will then buy smaller businesses as ” add-ons” as part of their growth strategy.

Competitors.  Sometimes competitors are owned by PEGS and/or are Synergistic but here I am referring to them in a more generic sense.  Competitors are buyers but unless they are actively acquiring competitors they tend to pay poorly and often (but not always) are a last resort buyer.  Of course, if you are in financial trouble they may be the only potential buyer.

Form an ESOP.   An ESOP is an Employee Stock Option Plan.  It is beyond the scope of this article to describe but in the right circumstances is an excellent way to sell your business.  The sale is to a trust that will own your stock for the benefit of your employees.  It is a retirement plan under the internal revenue code so it is quite complex.  Generally if you have 25 or more employees, stable earnings above $2,000,000, then and ESOP should be reviewed as an option.

Whichever buyer type makes the most sense for you and your firm make sure you understand what they will buy, when they might buy it, and most importantly what they will never buy.  As always you may call us to confidentially review your situation.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

Selling A Business; The Business Sales Process- How to Set an Asking Price For Your Business

All smart Business Brokers, Business Intermediaries, and Investment Bankers know, when a selling small business  you must have an asking price in order to get business sales activity.  Inexperienced Buyers absolutely want to know the business asking price.  If the asking price is too far from the business valuation pricing rules of thumb, they will tend to say they are not interested even if there hesitation really is because of price. Americans expect to negotiate, but only a little.  They tend not to want to insult the Seller by offering 50 cents on the dollar.  For this reason, it is important to price a business that is for sale correctly from the start.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

It is very tempting to price a business high and wait for offers.  Business brokers have learned that they rarely come.  Often when buyers do appear for an overpriced listing it is from someone looking to steal a business on the cheap who puts in very low offers on many businesses waiting for a desperate business seller to accept their offer in frustration..  Believe me, once you commit to sell your business, the process of selling your business seems to take forever even when it is progressing well.  When no one is calling, it really drags out.  Don’t overprice your business and, later, fall victim to this low-ball business buyer strategy.

There are buyers for almost all profitable businesses but there may be only two or three in a given market area.  You need to get these buyers interested. Proper pricing will do that.  We recommend that you price the business no higher than 10% above the high end of reasonable. This will give you negotiating room while presenting an attractive offering that will encourage prospects to continue looking at your business.

If, after 90 days of proper marketing and prospecting (ads are appearing in the right websites, direct mail and selected calling to the right people), you do not have serious prospects working on an offer then you should seriously consider cutting the asking price.  The market is telling you something.

If you are in a hurry to sell, price the business near an average price based on your valuation. Make sure you still have some negotiating room in your asking price.  Buyers will almost always find a problem and the ability to give a little back solves many problems.  If possible, always keep a few chips in your pocket to use to solve problems all the way through settlement.

Under priced?

One of my first listings was a small daycare center.  The Seller had made her decision to sell and was now in a rush to get it done.  She had been marketing the business for the past two months herself.  She did not have a huge investment and just wanted out so, because she wanted a quick offer, she had priced the business at about 75% of the fair market value.  Her one prospect proceeded to negotiate her down to 60% of the fair market value and still chose not to close.  Prospects assumed something must be wrong with the business for it to be priced so low.  We immediately suggested raising the price to 95% of fair market value.  This was low enough to generate contacts from real prospects and gave us money with which to negotiate with.  The business was sold and settled at 85% of fair market value in 60 days.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955

gcaruso@harvestbusiness.com
www.harvestbusiness.com

Harvest Business Advisors works with contractors, engineers, distributors, manufactures, professional and service companies as  business brokers or intermediaries, valuation experts, and succession and exit strategy consultants in Maryland, Pennsylvania, New Jersey, and Virginia.

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