Posted 01-10-2011 12:02 pm by
Do you have a business that you are toying with the idea about selling – and want to know its true value?
Consider first the fact that the value of the business is not just the price to be paid for the business itself, but rather also for other value drivers, such as future performance, deal structure and asset type.
The following drivers impact business value in several ways:
Future Performance – The true value of a business is largely dependent on its future performance, and not on its past. The history of how the business performed in the past helps the new Buyer to project how it will fare in the future. How the business will perform in the future relies on the current condition of the business, as well as what the new Buyer can and/or desires to do with the business. With this, the value of the business will change based on the Buyer and his or her expectations. Future performance of the business is gauged upon:
Cash Flow – perhaps the most important factor in assessing your business’ value.
Revenue – To many people’s surprise, revenue is a secondary factor when determining the value of a business. For example, if two businesses have the same revenue, but one has twice the cash flow, this company naturally would have a much higher valuation. On the other end, if the two companies have the same cash flow, but one has twice the revenue, his company will obviously hold the higher value.
Intangible Factors – Financial factors only provide a fraction of the calculation determining a business’ value. The real value is determined by the intangible assets, such as customer loyalty, contracts, trade secrets, reputation, contact lists, employee roster, strong management team, name recognition, quality of financials, industry growth trends, sales backlogs, and much more.
Financial Leverage – The higher a financial leverage, the lower the average cost of capital and thus, higher value. Financial leverage is based on the value of the assets, type of assets, business size, market conditions, credit worthiness, quality of earnings, post-acquisition management, etc.
Assets – It is important to know that when buying a business, are all of the business assets for sale, or just a portion? Will accounts receivable and inventory be included? What about the customer list and equipment? Find out everything about which assets will be included with the business purchase.
Financial Return Expectation – The value of a business is largely dependent on the Buyer’s expected financial return. If a Buye
r expects a high Return on Investment (ROI), the business value is lowered.
Cash Flow – As earlier discussed, a huge component in determining a business value is cash flow. A business with low fixed assets base and/or with low working capital requirements is valued much higher than a business with a high fixed assets base and subsequent high working capital. It is important to note here that while a high assets business increases valuation (as it provides more financial leverage), at the same time it lowers valuation due to the higher asset base typically requiring higher reinvestment of profits/working capital.
Deal Structure – The deal structure of a business alters the taxes and the debt service of the transaction. In most cases, “all cash” value is going to have a lower valuation than a business with Seller Financing due to higher cost of capital that is associated with equity.
Seller Financing – The amount of financing that a seller bestows to the buyer has an effect on the price of the business.
Stock Sale/Asset Sale – While business owners often prefer to sell stock with the expectation that such a transaction would result in a single capital gains tax, a stock sale can result in increased income taxes to a buyer due to the fact that goodwill is not tax-deductible, and depreciable assets cannot be “stepped up,” nor can depreciation charges increase. Not to mention, the buyer assumes all hidden liabilities.
Allocation of Sales Price – A buyer may value a business more that has a high allocation to consulting, as consulting expenses are tax-deductible to the buyer for the year incurred.
Exit Strategy – A buyer also considers the business’ exit strategy when considering its value. With regards to cash flow, the Buyer considers the amount of funds that would be realized at the end of the business sale. The value of the business today depends on the value of the business at the end of the sale.
Advantage Commercial Brokers are a team of advisors that specialize in selling privately owned businesses, commercial real estate, and small cap companies in merger & acquisition transactions. Learn more at http://www.acbrokersinc.com/index.php.
