Posted by Tom Gledhill on Tue, Jul 14, 2009 @ 01:53 PM
Most business owners have a dollar value in their head about what their company is worth. And most of them are wrong. The vast majority of business owners overestimate the value of their business. They factor in the sweat equity that they put in starting the business, the long hours they spent building the business, the infrastructure that they've built, the employees they've mentored, and the customer and vendor relationships that they've developed. But in the final analysis the determining factor as to what your company is worth is: How much money is the company making?
Over the years I've had several people approach me with products or services that they've developed but had no money or expertise to market them. They had no revenues and no immediate prospects. They had no patents and their intellectual property was minimal. In cases like this, with no revenue and no track record, it's extremely difficult to find a buyer. Best they try to find a partner to invest some marketing money to get the company off the ground. Unless you have a product or service that is patentable and world-changing, a company that has zero revenues is worth just that - zero!
Several years ago I represented a company in the boating industry. I liked the owner and I liked the product. He had developed several channels of distribution and had good prospects for future business. Based on his financials and other parameters, I estimated that his company could sell for about $300,000. He seemed to accept that. I put together the marketing materials and developed a marketing plan and began implementing the plan. I did receive a couple of offers in the $300,000 range. I knew that the owner had three brothers that owned an interest in the company and I assumed that they had agreed to my estimate of value. How wrong I was! They flatly rejected the $300,000 offer. They (the brothers) said that the company was worth a Million dollars and they were not going to sell it for a paltry $300,000! The rest of the story - they never sold the company. They closed their doors about a year later and sold the remaining raw inventory for pennies on the dollar.
Except in rare industries, the value of a small company (typically under 2 million in revenue) is a multiple of Sellers Discretionary Earnings (SDE). SDE is defined as operating income (with re-castible adjustments) plus owner's salary. The multiple is typically between 2 and 3. It can be less than 2 if growth is negative, reputation is not good, location (if a factor) is not good, key employees are not staying, customer and vendor relationships are not good, etc. On the other hand, it usually takes all of those factors to be positive in order to rate a multiple of 3.
In the boating industry case above, the brothers would have needed an SDE of about $400,000 with a multiple of 2.5 (which I thought was about right) in order to justify a value of $1,000,000. Since their SDE was only about $120,000, the company was only worth about $300,000. Buyers use the same methodology to determine a fair price, so if you use something different that yields an inflated value, you'll be spinning your wheels if you try to sell at that price.
Posted by Tom Gledhill on Wed, Jul 01, 2009 @ 10:40 AM
WHY USE A BUSINESS BROKER?
Four Compelling Reasons a Business Broker Can Maximize the Value of Your Business
A business owner chooses to sell their business for a host of very good reasons. They range from a desire to retire, health issues, inheritance and tax planning, life style or other external reasons. In all cases, the business owner has one objective, TO MAXIMIZE THE VALUE OF YEARS OF HARD WORK.
A business broker who serves as a value added advisor, agent and planner is essential to navigating the owner through the business assessment process, framing or packaging the business for sale, valuing and pricing,, buyer identification and the purchase and sales process.
Here are four attributes your business broker must have to optimize your business value:
1. BUSINESS ADVISOR: Objective assessment of your business and its value with direct counsel on tangible actions to take in the near term to maximize value. In addition your broker will prepare an informational package describing the business, assist in evaluating offers, negotiate terms and conditions, utilize banking contacts to arrange financing to minimize or eliminate the need for seller financing.
YOUR BUSINESS BROKER MUST WORK WITH YOU TO INCREASE THE SALES PRICE!
2. PROCESS EXPERTISE: A thorough understanding of the purchase and sales process that will expedite the transaction. Selling a business has eight discrete steps. Your broker should know each step cold, explain each one to you, execute each one to your jointly developed plan and monitor deal progress to the plan
YOUR BUSINESS BROKER MUST KEEP TRANSACTION ON TRACK!
3. NETWORK OF BUYERS: A national network and infrastructure that tracks interested buyers and investors will allow for a more robust pool of buyers. Your broker must have that network, in addition to qualifying all potential buyers on their financial capability and motivation.
YOUR BUSINESS BROKER MUST HAVE A BROAD AND NATIONAL NETWORK TO DRAW THE LARGEST POOL OF QUALIFIED BUYERS AND INVESTORS!
4. INDEPENDENCE AND OBJECTIVITY: Representing you and your business with independence and objectivity is imperative to maximizing its value. Your broker should understand the importance of maintaining confidentiality. Further, your broker should share information about your business with prospective buyers at the right time and in the right amounts based on interest and motivation. Your broker should be part of an accredited national organization with a strict code of ethics and professionalism. In addition, your broker should have an accomplished and diverse background as a business advisor, covering multiple industries and brokering deals of varying size.
YOUR BUSINESS BROKER MUST BE A TRUSTED ADVISOR!
Posted by Tom Gledhill on Wed, Jul 01, 2009 @ 10:32 AM
Several years ago I was sitting around a table in a conference room helping to negotiate a letter of Intent (LOI) between my client, a small $5M Telecom company, and a prospective buyer. Suddenly a knock came on the door and the business owner opened the door and went outside. He returned about 5 minutes later and beckoned me to follow him outside. "We just learned that we lost ABC Company as a client. They recently hired a new purchasing agent and he decided to go in a different direction. We'll have to end the negotiations and take the company off the market. We also need to cut our staff and restructure the company".
Why was ABC Company so important that they had to cut staff and restructure the company? Because ABC represented 52% of their total revenues! As their business broker I knew that when I took them on as a client, but I rationalized that since ABC was a multibillion dollar company that a strategic buyer would want an "in" to this company that had offices and manufacturing plants all over the globe. That may have been true for just the "right strategic buyer", but finding that buyer was like looking for a needle in a haystack. We had found a buyer who was willing to negotiate, but it was clear that the high "customer concentration" was going to seriously affect my client's value. With the loss of ABC Company not only did the negotiations with the strategic buyer end, but my client was struggling for survival. In the end my client survived as a much smaller company and the owner ultimately transferred ownership to a key employee for a fraction of the company's former value.
This is just one example of how high customer concentration can seriously affect the value of a company. It represents a risk to the buyer, and risk is directly related to a company's value. The buyer mentioned above was fortunate that the loss of ABC Company happened when it did - although the timing didn't have to be so dramatic!
If you, as a business owner, are in a position where one or a few clients represent a big chunk of your total revenue, you must try very hard to diversify your source of revenue so that you're not so dependent on a few large clients. This, of course, is easier said than done. If you can't diversify, or the timeline to accomplish it is long, make sure that you're prepared for the eventual loss of one or more of these big clients. Also, you must accept the fact that your company's value will be seriously affected in the eyes of prospective buyers.