Business Valuations for Sellers of Businesses

Selling your business is a challenging task and it is an important to get the selling price right....

Importance To Buyers & Lenders

Have you ever considered selling your business?

Have you ever been approached by a competitor or prospective buyer about selling your business?

As a business owner, if you plan to sell your business now or at any point in the future, we recommend a professional business valuation. If a business is overvalued, it will not sell. If a business is undervalued, the seller will lose hard earned cash. In most cases, a properly priced business will sell and all parties will walk away satisfied; a fair price is the result of a professional valuators opinion.

You have invested years of your life creating and building your business. When it comes time to sell, you deserve a fair price! Anyone can formulate an opinion and make an educated guess. Why gamble with millions of Rands based on value hunches? We can minimize your risk by providing a fair valuation based upon proven principles, market comparables, verifiable valuation models and a wealth of experience!

Know your Value.  Know your Business.

In today's economy, a business valuation is a definite requirement when selling a business for the following reasons...

• Buyers, lenders and other financial institutions must have a third party, professional opinion to protect their interests and ensure fairness in the business transaction.
• Sellers are protected by getting a fair price for their business. There is a significant difference between book value and fair value.
• Professional business valuations significantly reduce price negotiations and time to finalise the transaction between buyers and sellers.

Conduct a business valuation if you plan to sell your business! A business valuation will disclose key valuation drivers to maximise your business value for a future sale transaction.

Determining Maintainable Earnings

Most privately held businesses keep track of their financial performances by means of Balance Sheets, Profit and Loss Statements, and Statutory Tax Returns. This type of reporting is essential in a businesses' operation but it is not beneficial in determining the fair value of a business and its true financial performance. Buyer's buy future cash flow streams! Prospective buyers need to know the health of a business, how the money is being generated and spent and the operation's capacity to generate positive cash flow. Traditional, financial reporting inaccurately reveals the company's true earnings and profitability.

The process of determining maintainable earnings is integral in determining the value of a business. The process requires extensive investigation to ensure all relevant and appropriate adjustments are correctly reported. The objective is to sanitise a company's financial statements to present the economic reality and cash flow generation ability of the company, which in most cases greatly enhances the price fetched for the business by sellers.

A business owner's salary, commissions, perks, incentives, personal loans and discretionary expenses are all key areas that are examined when determining maintainable earnings. Such owner benefits are to be "added back" into the value of the company so that a future buyer can adequately assess the business, its cash flow, and future earning capacity. Additional areas of interest, such as included/excluded assets & liabilities as well as fair market value of tangible assets will be examined with the business owner, in an effort to correctly determine the value of the business.

What To Look For In A Buyer

A fairly priced business supported by a strong business model and earnings history will receive a great deal of inquiries from prospective buyers. This is assuming that a pro-active, professional business broker is representing the seller and has responsibly marketed, packaged and advertised the business for sale.

Getting a lot of attention is a great feeling for the motivated seller, but these feelings can quickly turn sour if prospective buyers are not properly qualified. In the business brokerage field, some philosophies suggest that for every sold business, one hundred buyers need to be considered. This law of averages obviously varies for each business, but taking the conservative route is a safe play for all involved. In order to scale this volume down to 5-10 highly-qualified buyer candidates, consider the following areas of interest:

1  Financial Power

Serious buyers should provide either a personal or business financial statement. If they are unwilling to do so, move on to the next opportunity. Be wary of buyer's who make claims of "money is not a problem" or "show me your numbers first". In most cases, they will be a waste of your time and energy. Exceptions to this rule would be a buyer who owns company "X" and is seeking expansion or a buyer that has purchased a number of companies in the past 12-18 months.

2  Previous Industry Experience

What businesses have they owned in the past or what companies have they previously worked for? The buyer should provide some type of executive summary or resume to answer these questions. Look for direct or indirect correlations to the nature of your business so that your company will fall into the right hands. It can be a negative for a seller to transfer the business to an inexperienced buyer which could result in a business downturn, negative public sentiment, and a black mark against the business you previously owned.

3  Expectations

What is the buyer looking for in a business? What industries or types of companies meet their expectations? Do they need existing management to remain in place? What are their return-on-investment expectations? It is important that some of these basic questions be answered early in the process so that 'realistic' buyers can be entertained and 'unrealistic' buyers eliminated.

4  Acquisition History

Better understanding the "How", "Why", "When", Where", and "Who" of a buyer's track record can save all parties a great deal of time and resources. Some of these will be answered in a personal or corporate financial statement. Others can be answered with references from the buyer as well as their personal thoughts and intentions. How long have they been looking to purchase a business? Why is the buyer seeking to make a purchase? Is geographic location a factor in their decision? Discover basic factors early-on with buyers to protect yourself and your business.

5  References and Track Record

How have other business owners dealt with the buyer? Have they worked with a business intermediary in the past? How well have the companies they have acquired performed? As a business owner and seller, you have to operate with transparency, honesty and integrity. This ensures buyers are confident in the subject business, its legitimacy and future potential. The same expectations should be in place for serious, qualified buyers so that the seller is confident in their legitimacy and the future of the business.

Going Beyond The Business Valuation

The business valuation is complete. You know what the fair market value of your business is and what to expect in the marketplace. So what's next?

At this point, it is important to identify what your short and long-term career plans are. Following a valuation, most businesses can be placed into one of the following categories: Time to Grow, Time to Sell, or Business as Usual.

Time to Grow

When starting a business, owners set goals. These may be short term plans to move into new facilities, increase staff by 50%, double the customer base, etc. Milestones and achievements made by a company will be reflected in how much that company is truly worth. Business owners who have plans to sell their business at any point in the future, tend to have a rough number in mind, or a trigger point for exit. Let's say a business owner's goal is to the sell the business for R50million. Following the business valuation, the value is determined to be R40million. This business is still R10million short of the trigger point. Assuming this business owner is still driven by his business and passionate to reach the R50million valuation, then it is time to set new targets to continue to grow the business.

A business valuation and the experts involved in the process of closely consulting with business owners, will be able to provide sound insight into how the business can maximize value by focusing on the key valuation drivers. Rather than sticking to the same game plan a company has followed in the past, why not make some key decisions and shift the course of the business in order to reach the R50million valuation target sooner, rather than later.

While each business is different and requires a unique game plan, some general areas that have proven to increase value for other businesses include but are not limited to...

• Focus on increasing Return on Equity
• Improve margin
• Increase velocity (reduce working capital and non-productive assets)
• Increase the debt/equity ratio
• Sell non core operations
• Internet's marketing potential (website, marketing, etc)
• Technology integration to increase efficiency (ABC, CRM, Reporting, Automation, etc)
• Increase profitable product distribution; reduce low profit product sales
• Greater emphasis on existing customers and repeat business
• Proprietary technology/operational developments to enhance business flow and competitive advantages
• Streamline business operations via consolidation and cost-effective measures

Time to Sell

Following a business valuation, many business owners are pleasantly surprised with the value of their business! When the suggested selling price is greater than an owner's expectations, odds are it is best to start the process of marketing and selling the business. Timing is everything and if a business owner has exceeded their own financial goals, realized that another owner could do more with the business, and/or is starting to grow weary of the day-to-day grind then it is time sell the business!!

A professional intermediary or business broker can sometimes be the most valuable employee you ever had. While this is not meant to devalue or undermine the loyal, highly-talented staff businesses develop over the years, it is meant to reiterate the critical role a professional will play in the transfer of a business. Selling a business is not easy. It is very time consuming, difficult and stressful. If a business owner has not sold several companies in the past, then it is imperative that they be represented by a professional broker. The broker's role is to cleanly and professionally package your company; develop discreet yet compelling marketing information on the entire operation; find, qualify, and present many potential buyers; serve as a conduit and buffer between seller-buyer discussions or negotiations; prepare for and manage the closing; and finalize the sale of the business. They get paid when you get paid; at the time when a successful sale is concluded.

The concept is quite simple. You are a business owner, not a business broker. While you will be able to speak intelligently about your business to prospective buyers, the time involved to go from listing to sale can easily take 8-12 months. In the meantime, if you went at it alone and did it yourself, the business could suffer. This could negatively impact the purchase price and the marketability of your company. In addition, should employees, key customers, or vendors begin to notice unusual behavior, they could quickly catch on that you are seeking to sell the business which can turn into a nightmare. Selling a business should be discreet, confidential, professional and timely.

Business as Usual

You finally have the answer to a question that has nagged you for years - "What is my business worth?". Now that you know, it quite possibly may be back to business as usual. If you are more than content owning and operating your existing business, enjoy what you do and the impact you have, thrive in your environment, and just have no reason to strategically grow or sell your business.....then congratulations!
If you do decide to take action in an attempt to exit remember the tips above.

Business Valuation Advisors

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