March 2010 Newsletter
Professional Valuations
Although more of an art than a science, a business valuation is a good tool to determine the market price of a business. When financing an acquisition, the SBA now requires a valuation be completed for transactions over $250,000. There are many business intermediaries that prepare valuations for their clients, and there are professional third-party valuation companies used by banks (SBA), attorneys, accountants, etc. Apex Business Advisors recommends using third-party valuation companies to complete a valuation because they don’t have a monetary benefit in the outcome of the valuation. It is the most honest look at the business with no influence by the business owner. Imagine having a valuation completed by a business owner’s accountant. Is there a chance that it would be a fair representation? Maybe.
The typical valuation will look at 3 years of financial statements or tax returns, industry information, financial trends, customer concentration, and other variables. Valuations are calculated using methods such as; multiples of net earnings, return on capital assets, direct market comparisons, liquidation value, and more.
Lessons Learned
Great companies can have their value slashed by having customer concentration issues. There is a perception of increased risk if one customer, who may be 25% of the revenue or more, becomes unsatisfied with a service or product and decides to end a relationship. Whether a business owner believes the risk is real or not is less relevant than what potential buyers and their bankers believe. If at all possible, work to reduce the concentration level of a customer to less than 15%.
The Apex Business Advisors team has over 50 years of experience dealing with business transactions. Call one of our advisors at 913-383-2671 to discuss your plans to buy or sell a business. Or visit our website, www.KCApex.com for more information.
Recent Transactions Completed
Family Restaurant – Independence, MO – $125,000
Print and Mail Service – Kansas City, MO – $1,100,000
Child Care – Kansas City, KS – $512,000
