Business Valuations are Critical

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business valueBusiness Valuations are Critical

You need to know the value of your business and understand what variables influence value. Considering that your business could be the largest asset you own, wouldn’t it make sense to educate yourself about business valuations?

Is there enough value in the business to retire? Have you cooked the books too much (hiding your profits) so your business isn’t marketable? How does your company compare to industry standards? If something happens to you, do you have enough insurance to take care of partners and heirs?

The most common and accepted valuation method for the typical small business is based on a multiple of Owner’s Discretionary Earnings. However, that’s just a starting point.

Here are a few of the many things a bank or prospective buyer may look at that could influence value:

  • Are there layers of management or just the owner?
  • Is the owner the only technical expert?
  • Is the owner the lead salesperson with most of the relationships?
  • Is there limited growth potential in the industry by region or niche?
  • Is the business revenue trending downward?
  • Is the business cyclical or seasonal?
  • Are there significant capital expenditures for new equipment?
  • Does one customer make up a large percentage of revenue?
  • Do the financial statements accurately reflect business activity?

Whether you are a buyer, seller, or one of our professional contacts, call your business advisor at Apex Business Advisors to discuss business valuation details.

When You are Selling Your Business, Don’t Make Major Last Minute Changes

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no adviceProspective buyers are looking for revenue, consistency and growth when looking at businesses to buy. Last minute changes, especially major changes, can impact the value of the business or make the buyer nervous about the unknown consequences. The buyer could also leap to an unfounded conclusion about why the owner is selling.

Here is an example:
A man talking about selling his business purchases a $700,000 piece of publishing equipment. He believes that revenues will rise and more clients will come on board because of the new capabilities. The problem is nothing can be proven yet. All we have to go on are the actual numbers from the past three years. These numbers do not support the increase in price that the seller is considering, and our recommendation is to wait to sell his business until he has proven the new publishing equipment is going to have a significant impact on the bottom line. If he decides to move forward, he will probably end up taking a loss on the capital expense if he wants to sell now.

A better way to have handled this would have been to recommend the machine and potential results to a prospective buyer. There are many ways that the prospective buyer could have funded the purchase of the equipment instead of taking on the debt. The seller was debt free when this decision was made.

Before you make a major decision, be sure to talk to your broker about the impact on business value and sale strategy as well as timing.

Beware of “Investors”

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left outKnow who your investors are – Will they stand behind you?

The majority of the buyers we see (whether individual or corporate) want to acquire a business as the sole owner. Successful partnerships are rare, let alone successful investor backed buyers. We often see a buyer who claims to have investors that will back them on any given deal. This raises a red flag immediately for us based on our past experience. The investors are never at the meetings. The investors don’t fill out the forms or financial statements. They can back out at any moment, without giving any notice.

For investor backed buyers, we require all parties to sign the contracts as a group of prospective buyers.

Here are three stories of investors that have backed out of deals in the last 2 years:
1) An investor backed out at the last minute because a girlfriend he met in Las Vegas wanted to open a bar in Vegas.

2) An investor backed out at the last minute because he decided he wanted to buy classic sports cars and race them instead of buying a business.

3) The buyer and investor couldn’t agree on their shares of ownership. Investors usually want a big piece if they are the major funding source.

In all of these situations, the buyer was not in control of the deal and was left with no funding and no clear way to move forward to get the deal done. You have to be sure to protect yourself if you are going to rely on other parties to get your deal done. Do your homework and make sure that there is some kind of contract in place that outlines the partnership agreement for all parties before trying to buy a business.

If your broker has a funny look on their face if you mention that you have an investor, now you know why. Roughly 1 in 100 deals are successful when outside investors are involved. Contact an Apex Broker if you would like more information.