In my last blog, “Why Net Working Capital Must be Considered in Transactions,” we looked at the potential purchase or sale of a business. Today, we’ll focus on the selling side.
Selling a company can be a daunting task for a small business owner. With countless legal experts, consultants, bankers and accountants from which to choose, a small business owner may be asking, “What services do I need and who should I hire?”
One very important and often overlooked step in the process of selling a small business is obtaining a valuation from an expert in business valuation.
- A business valuation conducted by a neutral third party helps set an objective baseline expectation of the sale price.
- A valuation expert has access to databases that contain important financial information about recent transactions involving similar companies.
- Obtaining a business valuation can unveil issues or opportunities that the business owner did not realize existed.
- Frequently, the valuation expert will help the seller identify adjustments for personal, non-operating and non-recurring expenses that may increase the value of the company. While nobody knows a company better than the owner who has spent his life building and running the business, it is often helpful to have an independent expert take a second look.
- A valuation expert can help a business owner spot accounting and tax issues that better position the company for sale.
Many small business owners rely on market multiples or rules of thumb to determine a selling price. These tools can be helpful in certain situations, but many times a particular business has unique attributes that make reliance solely on unsubstantiated multiples and rules of thumb unreliable. This is especially true for the thousands of Baby Boomer entrepreneurs who have created unique businesses over the past fifty years and are now looking to sell as they ready for retirement.
I think of selling a business without obtaining a valuation the same as buying a car without researching its value. You have two routes to take:
- When you go to the car dealership, you will be approached by a salesperson trying to sell you a car for as high of a price as possible. You aren’t familiar with the value, so the price you hear is the price you presume it is worth.
- If you have done the appropriate research ahead of time, you will understand the value based on the type of car, the added features and as a result, are able to negotiate a mutually agreeable price with the salesperson.
While obtaining a business valuation is a more involved process than searching Kelley Blue Book for the fair market value of a vehicle, it is well worth the time and money to know what your business is worth when you begin negotiations with a potential buyer. After all, you are selling your life’s work.
One of our clients recently received an unsolicited offer to purchase his business. The offer was based on multiples of the previous year’s revenues and EBITDA. The business owner was very pleased with the offer and may have even considered selling at this price. Luckily, he hired us to take a closer look. The company was experiencing rapid growth, which was driven by a newly-developed technology. In 2014, the company is projecting sales ten times greater than 2013 levels. Because of this rapid growth, it did not make sense to use a multiple of prior year’s revenues or prior year’s EBITDA. Applying valuation techniques that took into consideration the company’s growth and future earnings indicated that the company was worth far more than that advanced in the original offer. Without going through the process of obtaining a valuation, the business owner would have left a significant amount of money on the table.
A business valuation is an essential piece of information for small business owners looking to sell their companies and who want to maximize the value of their lifelong investment. The valuation will give the owner an objective indication of his or her company’s value, offer an independent and objective analysis of the company’s strengths and weaknesses, and provide the business owner with an important tool to evaluate any and all offers. When sorting through the abundance of consulting, legal and financial services related to selling a business, a small business owner should be certain to obtain a valuation from an experienced and qualified expert. Selling the company is likely the most important transaction of a business owner’s entire life, and it should not be done without all of the facts and information necessary to make an informed and intelligent decision.
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