Not all buyers are created equal. We could debate about the types of business buyers out there but, excluding individuals, lets distill buyers into three categories - financial buyers, strategic or synergistic buyers, and buyers with some DNA of both previously mentioned (or hybrid buyers). In the merger and acquisition (M&A) world we frequently refer to a private equity group (PEG) as a financial buyer. Why? Well, PEGs are formed to pool resources from investors that may have an interest in “sector” investing. Look at a private equity group website like Huron Capital and you’ll see terms that resemble investor terms - minimum EBITDA, Sectors Invested, etc. A PEG may also be a synergistic investor depending upon what types of investments are in its portfolio. A synergistic buyer, by contrast, may consider acquiring a company because it adds synergy to its existing business. Consider Google’s acquisition of DoubleClick for $3.1B. In order for the buyer to justify the acquisition there must be synergy. Is a financial buyer better than a synergistic buyer or is a synergistic buyer better than a financial buyer?
A group of intermediaries within our nationwide network of advisers (The Business House, Inc) has released a strong recommendations list on how to increase small business cash flows. Following these tips can most certainly boost a company’s business valuation. Below is a recap of the key points:
Cash Flow is KING: Cash In - Cash Out = Cash Flow
- Organized Record Keeping (we harp on this topic in other posts)
As a business owner, you obviously want to be cognizant of decisions and factors within your business that will positively or negatively influence its value. Below is a breakdown of some key areas you can focus on today to ensure that your company’s value is protected should you ever need to conduct a business valuation and if you ever plan to sell:
The SBA’s Standard Operating Procedures (SOP) was recently updated and released. It is more streamlined and condensed, allowing for easier reference to and understanding of guidelines.
One specific area we want to highlight is the requirement of an independent, third party business valuation for SBA loans exceeding $350,000. Here is the exert:
(i) Business Valuation
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.
CNN Money put out a great Q&A article a couple of weeks ago: How to sell a million dollar business. If you are planning or hoping to sell your 1-2 million dollar small business in the next 2-3 years, save this to your favorites. Highlighted topics include:
- A business broker can be your best ally in selling a business of that size
- Questions to ask a business broker
The NY Times tackles a very important topic for today’s business owner: what to do when partners want to split. A buy-sell agreement protects all owners in a business for events when a minority, majority or equal owner decides or is forced to leave a business. In most cases, a buy-sell agreement will include a provision for determining “fair market value” via a credible third-party business valuation.
Businessweek.com put out an article today under its Small Biz section titled “How to sell your business”. We want to draw your attention to the section discussing business appraisal. In summary, the author of this article suggests that the business owner conduct an analysis of their financial statements and an exercise known as “recasting”. Bottom line, this is an adjustment of owner’s salary, discretionary expenses, one-time fees, interest, depreciation and other expenditures. Then, the writer suggests the owner adjust fixed assets to fair market value. Once complete, THEN hire a business appraiser. Huh?
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.
The Financial Times and Canada.com are at it again and has published a compelling�article�titled “Working out what your firm is worth”��for small business owners and their need to conduct recurring business appraisals.� While some businesses do not need annual appraisals, most privately owned companies do need one at some point in its existence. It is very common for an owner to grossly over value their business based on the blood, sweat & tears they’ve invested over the years to get to where they are today.� While sweat equity is valuable, there are specific indicators a valuator will examine in order to determine “fair market value” of a small business. A key factor for�the business valuation is what is expected to happen in the future when the existing owner is removed from the equation?� If a small business is heavily dependent on that owner’s reputation, expertise & services it could have a negative influence on future financial successes; thus�devaluing such a business.