What is the Value of Your Business?

Value is in the eyes of the beholder or buyer.

Today, there are more small businesses for sale than at any time this century.

While sellers have one idea of a business’s value, buyers have another.

Therefore, in this competitive marketplace, before initiating a sales process it is important to know its value.

While a seller may think the value of a business is related to its assets, sales and profits, professional deal-makers often have a different idea of where the value of your business truly resides.

Here are a few critical things to know about how a buyer sees a business’ value and ways to maximize its’ value before a sale, merger, etc.

Highlight unexplored opportunities

Identifying all of the opportunities that the seller could take advantage of in growing future profits.  A buyer is going to focus on what they can do with the business after they put their time, money and other resources into it; not what has been done.

Consider what additional resources could have propelled the business to extra profits.  Be ready with a plan that identifies opportunities along with the estimated time and cost to pursue.  Buyers are often attracted to owners and business leaders who can envision taking the firm to the next level.

Focus on your business’ future, not the past

The buyer is seeking his/her future with the business as a base.  In the presentation to potential buyers include a description of intangible assets, such as customer list (consider number, life time value, longevity), contracts (terms and especially if multi-year), reputation (in marketplace and ratings), supplier relationships (terms and rapport), and distribution channels. Also identify opportunities to improve the value of these intangible assets.

One intangible asset that buyers value is the company’s ability to operate without the seller. If he or she wants to leave the business after the sale, are there employees that can take over the company? If yes, that’s a huge intangible asset.

Other intangible assets include the company’s unique channels of distribution. Has it diversified the customer base to make it more resilient to market forces and the competition?

Is the company’s good reputation tied to the seller personally or to the organization? If it is tied to the seller personally, it’s time to begin transferring that reputation to others inside the company so that buyers find value there.

Recast the financial documents to maximize profits

While most business owners make every legal decision they can to minimize the value that is presented in their P&L, most buying company CEOs need to maximize profit to keep their job.

These differing approaches can be reconciled by recasting the financial past. The “add backs” that many financial professionals talk about are less than half of the answer; buyers will also perform an M&A recast to rewrite the target company’s financial history as if they had always been part of the acquirer’s firm.

Turn to the experts for valuation guidance

The need to have value determined by an M&A professional or an MR&A firm is critical. This should not be left an accountant or a broker. The buyer will be buying his or her future, not the company’s past; they are not going to calculate value based on some multiple of the seller’s past results.

Many sellers believe that multiples and formulas are the way to determine the value of their firm. But buyers use multiples for negotiating purposes, to set low expectations in the seller’s mind.

Ultimately, buyers will calculate value based on a forward projection of the future of the business under their ownership. They will then use a discounted cash flow approach to determine the maximum value of that future.