Be honest. You’ve thought about this many times. After a bad day, you have thought about getting out. Employee issues? “This would be great if it wasn’t for having to manage personality conflicts,” you’ve often thought. You don’t need the hassle. You’ve heard people talk about business valuation, multiples of earnings, multiples on sales and so on. You many even have asked your accountant what your business is worth.
If you’re like most people you have an idea (or even a plan) about how much you need to retire. For many people, this is what they want (sometimes even believe) their business to be worth.
Inexperienced intermediaries push sellers to pay for business valuations. Our belief is that you should never pay for a valuation. We will do this for you at no charge. With our daily interaction in the marketplace, our access to a private database of business sales and comparative data for recent transactions in a wide range of industries keeps us informed about current prices actually being paid. We have purchased our own businesses and know how buyers value businesses. Based on our experience, we can provide you with a value range that you are likely to achieve in today’s market so you can make an informed decision to proceed with selling your business or wait until a later date. We welcome collaborative discussions with you and your accountant.
There are numerous scams in the industry selling valuations for $2,500 to $50,000. We have met dozens of business owners who have paid a lot of money to simply receive a useless, generic valuation. And, in the marijuana industry, there are an especially high number of unlicensed brokers who simply do not know what they are doing (as well as several licensed brokers who do not know a thing about the marijuana industry).
The value of your business is driven by many factors, some financial and some not. Buyers are attracted to cash flow. Risk is the enemy. The less perceived risk in a business, the higher the value that will be received. For example, the following factors can impact the value of your business:
- The predictability of cash flow. Businesses can have recurring revenue (payroll business, self storage, monthly maintenance agreements, etc.) or no recurring revenue (most contractors). Predictability also includes the fluctuation of sales and profits over several years.
- Customer concentration can affect value and terms. Companies with no concentration (no customer accounting for greater than ten-percent of sales) are, all things being equal, going to yield a higher price and more attractive terms than a company with high customer concentration.
- The state of your financial information (clean and orderly vs disorganized and messy) will impact valuation. It is important to have solid, clean financial statements and information when moving forward to sell your business.
- A growing business–one that can stay on that trajectory–is going to yield a higher value than a flat or shrinking business. Similar to the stock market, buyers will pay a premium for businesses that are growing and have realistic growth opportunities.
- The importance of the owner to the business is one of the most important, and least talked-about, attributes to the value of the business and the attractiveness of the business to someone else. On one end of the spectrum is a business with an absentee owner. The other end of the spectrum is a business where the owner is working 60+ hours per week, has unique experience learned over years, has personal relationships with customers, and may even have some license or certification (PE, CPA, Dr.) that is required. The key for a buyer is to be able to imagine themselves replacing the owner and to conceptualize the risks associated with that replacement.
- The quality of management, tenure of the workforce, and general feeling among the employees of the business will affect a buyer’s value.
- The company’s competitive position in the market and the general competitive environment will have an impact on value. A company in a high-price sensitive market will yield less value than a company with an oligopoly or monopoly.
- The barriers to entry will affect valuation. For example, a home cleaning business will yield less value (everything else being equal) than a company with a “Solid Defense”. Solid Defense can mean patents, trade secrets, brand names, special licenses, and other characteristics that provide a strong barrier to existing and new competition.
- High-margin businesses will attract higher valuations than low-margin businesses. A chemical company with 80% gross margins will be more attractive than an auto parts company.
- Other intangible factors will affect value. A fun business that a buyer is excited about–where customers are happy to receive the service or product–yield more value than businesses where most customers are not happy or excited about having to patronize the company (such as a transmission shop).
Since so many factors can impact valuation, we require a meeting with the owner to get an cursory understanding of the business before presenting a valuation. We need an understanding of the entire business, not just the financial performance of the business.
When we perform a valuation we estimate all fees and taxes in order to give you a net cash walkaway (after tax) estimate of what you will receive at closing. This is far more important than just a basic valuation because deal structures (asset sale vs. stock sale on C-corporations) can have a significant impact on taxes. We want you to understand what to expect and not have an unpleasant surprise late in the process of a sale.