A seemingly salacious title to a blog post, but the Business Valuation industry originated from alcohol – or lack thereof.In 1920 with the enactment of prohibition many enterprises that were engaged in the alcoholic beverage business were allowed tax breaks by the U.S. Government for “damages” suffered. In order to determine certain tax benefits to these businesses their “intangible value” or “goodwill” had to be determined. Prior to this time it was commonly believed that the value in a business was essentially the value of its assets less its liabilities.But, as we know today, business value comes in many forms – although most notably in the cash and profits it generates, has generated, and will generate. But goodwill is also imputed into a brand name, some special technology that may or may not have materialized into a market, and in a myriad of other ways. Even a stable staff generates goodwill.As a direct result of prohibition the IRS published a document called the Appeals and Revenue Memorandum (or ARM) 34. ARM 34 presented two novel ideas: 1) Goodwill exists if a business has earnings in excess of another “like business” and 2) Goodwill value is determined by calculating the “current value” of those excess earnings. These concepts formed the basis for the practice of business valuation today. Additional questions, responses, and new sophisticated methods dealing with business valuation resulted. Check us out over at Fair Market Valuations to find out more.Posted by: John Klearman, Fair Market Valuations
Most Americans continue to read, hear and see troubling news about the U.S. economic outlook. Business owners need some reassurance that the sky is not falling, particularly for business owners considering the future sale of their business. Today is a seller’s market! But, cyclical indicators point that this window will not stay open forever.
Business valuation indicators are showing strong multiples for technology and software-related companies as well as those that cater to the baby boomer and senior demographics. For the fifth consecutive year, Inc and Business Valuation Resources (the authority on valuation data, metrics, and comps) have prepared an interactive study to analyze the valuation of middle market companies (those with annual sales from $10 million $500 million). Take a moment to visit this resource and see how your company stacks up compared to nearly 4,000 mid-market transactions analyzed over a 3-year window.
A word of caution. While more than 140 industries are analyzed, you may not find an ideal comp for your business. There is a big difference between a strategic buyer and a financial buyer. Small businesses with sales of less than $10 million need to be aware that rule of thumb multiples based on adjusted EBITDA are typically less than middle market. Per Rob Slee’s excellent book “Midas Managers”, firms considered small business generally see 2-4X adjusted EBITDA while those with sales in from $10MM to $100MM are more likely to see 5-7X. Using a generic multiple is very dangerous for any business owner and is not recommended. Determining your company’s market value through the process of an independent business valuation is THE first step and owner should take prior to taking their company to market. Let’s take a $1MM annual sales, $200K discretionary cash flow business. Using a simple 2-4X multiple leaves a gaping margin of error of $400,000!!! Your business is most likely your most valuable asset. Don’t fall prey to assumptions and being a penny-wise, pound foolish when it comes to business valuation. Each buyer is different, with different motives for acquisition (financial, strategic, etc). A business priced too high will not sale. A business priced too low, well you know what happens then.
Know your value. Know your business.
Over at BNET, they are developing a series on the topic of M&A with goal of empowering business sellers and buyers to “Be a Master M&A Negotiator”. We like BNET because they take complex issues and spell them out in layman’s terms making it easy for most to understand and learn. The portal with various resources is here.
Thus far, they have an assortment of interviews with M&A veterans as well as informative videos with visual & audio demonstrations of common M&A deal challenges. If you plan to sell a business, this is a great resource so you can get into the head of a potential buyer as most recommendations are for buyers.