Often times, public company data is used when attempting to value a privately-held firm. This comparison usually requires substantial adjustments to offset the risks inherent in the privately-held or closely-held company. These potential risk characteristics are usually elements that are overlooked by sellers, but not by potential buyers.
Sellers obviously look at their companies much differently than do prospective acquirers. Owners and company officers tend to place value on different factors than does a buyer. However, when it comes time to sell, it's important that the seller consider those factors that are important to a buyer.
Interviews with buyer prospects reveal that they are concerned with, and influenced by, the factors outlined below. They are often the basic considerations that determine whether they actually purchase the business, as well as the price they are willing to pay. It is the buyer's evaluation of these factors that can make or break a possible sale.
Buyers tend to look at these elements as risk factors. They also look at the expectation of future earnings. The following characteristics affect, both positively and negatively, the future earnings potential of and the risks involved in a target business.
Historical Earnings
The history of a company's earnings is very important to a prospective buyer. A long history of stable, and hopefully increasing, earnings is a positive factor in whether the buyer will pursue the acquisition. Conversely, a brief history or inconsistent earnings will certainly be a negative factor. A short time frame (for example, a company that has been in business for a year or less) and erratic earnings present obvious risk factors.
Entrepreneurs often underestimate the costs (and time) necessary to get the company to a profitable level. Start-ups are difficult to sell under the best of circumstances. The next time period in the life of a business is after three years, at which point there is some history, and a track record is beginning. The third period is usually after the company has been in business for a minimum of five years. Now the company has a track record and a reasonable history of performance.
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Wednesday, December 21, 2011
Tuesday, December 20, 2011
Selling Price Defined
When the time comes to sell your business, what makes up the selling price. What is it that you are selling and the buyer is buying? It is important that the selling price be defined in such a way to avoid any confusion. Below you will find some sample wording used by business intermediaries to define the selling price. Keep in mind that this is sample wording only and is presented here merely for informational purposes.
■The term “selling price” shall include (a) the selling price of the assets acquired plus any obligations assumed by the purchaser, (b) if the sale becomes one of stock, then the selling price will be all of the assets plus all of the liabilities of the corporation plus the value of any covenants not to compete, employment and/or consulting agreements plus the value of any allocations for goodwill and/or intangible assets.
■The total sale price shall consist of all consideration received by the owner and/or the company including the sum of the following:
(a) The total amount of cash received by the company and/or owner in connection with the sale, lease, or other transfer of the company, or any interest therein. Such cash consideration shall include but not be limited to purchase price, lease consideration, non-competition payments, consulting payments, license fees, royalties, retained cash, and other consideration received at or subsequent to the consummation of the sale transaction.
(b) All future, contingent or undetermined amounts in whole, such as an “earnout.” The commission shall be based on the actual amount of such future or contingent payments as and when they are received.
(c) The current fair market value of all non-cash items such as securities, notes or other property.
(d) Any amounts retained by the company for ultimate distribution to the owner, including any salaries, bonuses, deferred compensation, liquidation proceeds, or other amounts (in excess of the owner’s historic salary) received, retained or withdrawn by or for the benefit of the owner (including profits generated prior to closing) from and after the date of execution of this Listing Contract.
(e) The amount of any liabilities assumed by a purchaser (except for unsecured liabilities shown on the company’s financial statement or unsecured liabilities which arise hereafter in the ordinary course of the company’s business; i.e., any secured debt assumed by a purchaser shall be part of the sale price.
■The term “selling price” shall include (a) the selling price of the assets acquired plus any obligations assumed by the purchaser, (b) if the sale becomes one of stock, then the selling price will be all of the assets plus all of the liabilities of the corporation plus the value of any covenants not to compete, employment and/or consulting agreements plus the value of any allocations for goodwill and/or intangible assets.
■The total sale price shall consist of all consideration received by the owner and/or the company including the sum of the following:
(a) The total amount of cash received by the company and/or owner in connection with the sale, lease, or other transfer of the company, or any interest therein. Such cash consideration shall include but not be limited to purchase price, lease consideration, non-competition payments, consulting payments, license fees, royalties, retained cash, and other consideration received at or subsequent to the consummation of the sale transaction.
(b) All future, contingent or undetermined amounts in whole, such as an “earnout.” The commission shall be based on the actual amount of such future or contingent payments as and when they are received.
(c) The current fair market value of all non-cash items such as securities, notes or other property.
(d) Any amounts retained by the company for ultimate distribution to the owner, including any salaries, bonuses, deferred compensation, liquidation proceeds, or other amounts (in excess of the owner’s historic salary) received, retained or withdrawn by or for the benefit of the owner (including profits generated prior to closing) from and after the date of execution of this Listing Contract.
(e) The amount of any liabilities assumed by a purchaser (except for unsecured liabilities shown on the company’s financial statement or unsecured liabilities which arise hereafter in the ordinary course of the company’s business; i.e., any secured debt assumed by a purchaser shall be part of the sale price.
Monday, December 19, 2011
What is the Value of Your Business? It All Depends.
Why do most business owners want to know about the value of their business? This question is not intended to be flip, but it is one that needs to be answered. Of course, there is the curiosity factor, but there is usually something behind that wanting-to-know. Does an owner need to know for estate purposes? Does the bank want to know for lending purposes? Is the owner entertaining bringing in a partner or partners? Is he or she thinking of selling? Is a divorce or partnership dispute occurring? Is it for a buy-sell agreement? There are many reasons why knowing the value of the business is important.
The reason for the valuation is critical. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. The departing partner wants as high a price as possible. If an owner is selling half of his business to a partner, he or she would want as a high a value as possible. In the case of a business loan, a lender values the business based on what he could sell and thus recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate, or other similar assets.
In almost all cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value. It is normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.
It is interesting that the most common definition of value begins with the phrase “The price…” Most business owners, when using the term “value,” really mean price. “How much can I get for it if I decide to sell?” If there are legal issues, a valuation is most likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells there really isn’t a price.
Click "HERE" to view the entire article.
The reason for the valuation is critical. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. The departing partner wants as high a price as possible. If an owner is selling half of his business to a partner, he or she would want as a high a value as possible. In the case of a business loan, a lender values the business based on what he could sell and thus recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate, or other similar assets.
In almost all cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value. It is normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.
It is interesting that the most common definition of value begins with the phrase “The price…” Most business owners, when using the term “value,” really mean price. “How much can I get for it if I decide to sell?” If there are legal issues, a valuation is most likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells there really isn’t a price.
Click "HERE" to view the entire article.
Thursday, December 15, 2011
Price and Value: Any Difference?
The question most often asked by those considering placing their businesses for sale is: “What is my business worth?” The question that should be asked is: “How much can I get for my business?” Worth and value are words that in many cases are interchangeable. Leading business appraiser Shannon Pratt, in his book Business Valuation Body of Knowledge, states that “Price is the face value at which a specific transaction occurred. It may have been arrived at arbitrarily, by negotiation, by contract, by court order, or by some other means. It may or may not comport to any definition of value discussed herein.”
“Fair Market Value” is a term that sounds tailor-made for a business owner who wants to know what his or her business might sell for. The U.S.Treasury Department offers this definition of Fair Market Value: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This might work in theory, but not in the real world. The word “negotiation” is not used, so arriving at this Fair Market Value is assumed to just happen. The sale of a business simply doesn’t work that way.
The price that a business may sell for is generally far removed from its value. Value tends to be an exact price for a specific date and must be able to be defended by the appraiser. There are many different types of value, based on the purpose of the valuation and/or the reason behind the decision to sell: divorce, insurance purposes, bank loan, partnership issues, buy-sell agreements, tax concerns, ESOPs – the list is lengthy. In many cases, each reason may result in a different valuation.
When a seller asks what he or she might receive for their business, there is no right answer. It depends, for one thing, how badly the seller wants to sell. Regardless of who places a price on the business, it will be the marketplace that ultimately determines the price. The seller may not agree with this, but he or she will have to accept it or face the fact that the business most likely will not sell, regardless of asking price or perceived value. It all boils down to a buyer’s perceived value of the business.
Professional business brokers know the marketplace, what businesses are selling for, what buyers are really looking for, why they may be buying, and most importantly how to deal with perception of value.
“Fair Market Value” is a term that sounds tailor-made for a business owner who wants to know what his or her business might sell for. The U.S.Treasury Department offers this definition of Fair Market Value: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This might work in theory, but not in the real world. The word “negotiation” is not used, so arriving at this Fair Market Value is assumed to just happen. The sale of a business simply doesn’t work that way.
The price that a business may sell for is generally far removed from its value. Value tends to be an exact price for a specific date and must be able to be defended by the appraiser. There are many different types of value, based on the purpose of the valuation and/or the reason behind the decision to sell: divorce, insurance purposes, bank loan, partnership issues, buy-sell agreements, tax concerns, ESOPs – the list is lengthy. In many cases, each reason may result in a different valuation.
When a seller asks what he or she might receive for their business, there is no right answer. It depends, for one thing, how badly the seller wants to sell. Regardless of who places a price on the business, it will be the marketplace that ultimately determines the price. The seller may not agree with this, but he or she will have to accept it or face the fact that the business most likely will not sell, regardless of asking price or perceived value. It all boils down to a buyer’s perceived value of the business.
Professional business brokers know the marketplace, what businesses are selling for, what buyers are really looking for, why they may be buying, and most importantly how to deal with perception of value.
Wednesday, December 14, 2011
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