A business valuation that starts with a broad group of comparable companies may not truly reflect the value of the company being sold.
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In the case of a holding company, the value of the company is made up of a collection of other corporations or equity or debt investments. Each asset may have its own policy about cash flow distributions to the holding company, so a discounted cash flow valuation is meaningless. However, exceptions exist with energy or commodity companies.
Similarly, a gold company may provide cash to its owners on a regular basis, but its gold is the most important value driver. As mentioned previously, one of the major causes is the gap between what the owner believes the business is worth and the price the buyer is willing to pay. Oftentimes, this is because an owner has focused too much on business operations, and not done enough to research or plan for its eventual sale.
To avoid this issue, implement the following best practices:. However, for business owners, the best course of action is the opposite: you should ensure that the rest of the team can operate without you. Though you may have been the main point of contact with key customers for years, consider delegating and transitioning these relationships to your team.
Otherwise, if and when you leave, there is no guarantee that these clients will stay with the company. The risk of losing important sources of revenue or supply can significantly reduce a purchase price or lead to a failed transaction.
Examine your current business practices and, if necessary, adopt efficient operating procedures before the sale. This may involve investments in new equipment or technology, or it may mean adding or reducing staff.
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For example, buyers will be less interested in a business that diverts the time of highly-compensated employees towards tasks that can be done more cost-effectively by others. I have been involved in many transactions where the pro forma financials and resulting purchase price are adjusted to account for needed or excess employees. If a buyer senses a risk that efficiencies and cost savings are not achievable, they will adjust the purchase price downward. Therefore, implementing these measures before a sale reduces can help justify a higher valuation.
For most businesses, sales revenue dictates the majority of its value. For businesses with a concentrated customer base, the risk of losing of one or two customers can place downward pressure on the purchase price. You should broaden the customer base to reduce reliance on a small number of key customers. Alternatively, if you are heavily reliant on a single distribution channel, diversifying the distribution of products or services can also help maximize value. Multiple sources of revenue are always going to lead to a higher valuation.
Buyers need to rely on accurate financial statements and systems to assess the financial performance of a business. This represents a risk to buyers. Buyers prefer seller financial statements that are audited by a high-quality, independent, auditing firm. Many business owners use local accounting firms when they start their businesses, and stay with them as the business grows. As a result, the numbers may not properly incorporate procedures that would be used by a larger firm specializing in business accounting. The inability to provide comprehensive and professionally-prepared statements to a buyer might reduce the value of the company.
As a business owner, you have undoubtedly devoted a substantial part of your life to building your business. The decision to sell your business can be simultaneously scary and liberating. Richard Branson recently provided an interesting account of his decision to sell Virgin Records:.
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But it was also a necessary and calculated risk. I had never even thought about selling Virgin Records. From a tiny start-up, we grew into the biggest independent record label in the world. If we had carried on running both companies they both would have closed…[B]y selling Virgin Records we left both companies in strong positions and kept a lot people in their jobs. Both businesses are still thriving today. Investing in advance planning for the sale of your business is critical to realizing a return on the resources you have already put into it.
It is natural to think that the time to properly position and sell your business is an unnecessary burden. However, this time is crucial for enhancing the sale price and ultimately helping you realize the full value of the business. The combination of the right team and adequate investment of time can be the difference between simply closing up shop and maximizing a source of future wealth. There can be non-financial motivations for selling as well. Examples include: retirement, burnout, and the desire to own a bigger business.
Selling IT Companies | Bob Chalfin's Book | The Chalfin Group
Finance All Blogs Icon Chevron. Filter by. View all results. Jeffrey Mazer. Jeff has extensive experience within the financial services industry, excelling in a number of roles ranging from portfolio manager to CFO. Key Highlights Current market conditions are prime for selling a business. The market is experiencing high multiples due to plentiful dry powder held by private equity firms, record amounts of cash held by strategic corporate buyers, a low interest rate environment, and high prices for publicly-traded equities.
The time it takes to sell generally ranges from five to twelve months. The determining factors around timing include the size of your business and the dynamic balance between buyers and sellers in the market. Valuations are more of an art than a science. The best business valuation methods typically involve cash-flow. Still, the three most commonly utilized valuation calculations are the discounted cash flow, market multiples, and asset valuation.
The best practices for maximizing shareholder value include the following: Make sure the business can thrive without you. You need a management team or key employees that can continue to drive cash flow, especially if you plan to exit the business or will have limited involvement in day-to-day operations. You should also broaden your customer base so that the business is not at risk if a couple key customers leave post-sale. Learn the dynamics driving acquisitions in your industry. Many business owners spend their time focused on keeping the business running instead of devoting energy to planning for its sale.
Stay apprised of the motivations for financial and strategic buyers in your industry, as this can help you negotiate a higher exit value. Hire the right advisors. Early engagement of an independent valuation specialist can provide a market check on valuation and allow you to incorporate value drivers into your pre-sale planning.