With over one hundred variables and critical steps in buying or selling a business, one very important question is, "What price are you expecting when you sell your business?" I always ask this question of our clients. The answers are as different as the owners and businesses. "We need $10 million to give us the type of retirement we want. We have invested $2 million in the product. Our investors have put in $3 million so far. It should sell for $5 million. I heard that xyz Company got $30 million for their company." To be very direct, my response to my clients doesn't tend to score points with them, but it is the truth. The market doesn't care. The potential buyers don't care how much it cost you to develop the product, or how much your investors have in, or how much you need to retire, or how much you think your business is worth. Buyers look at the potential ROI (Return on Investment) in a company. Depending on the industry and type of business, buyers are typically very knowledgeable in determining today's fair market value. If you are fortunate enough to have a technology that can be leveraged, the market may look at the future returns of that technology in stronger hands. There are benchmarks that are often used as a starting point for many businesses. The most common in a merger or acquisition situation is an EBITDA multiple for the trailing twelve months. EBITDA is simply an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is the standard for privately held companies just as PE multiples are to a business valuation metric for publicly traded stocks. There are additional methods such as revenue multiples for unprofitable companies, discounted cash flows and others, as well. Depending on your industry, rate of growth, uniqueness of product or service, technology or intellectual property, barriers to entry or patent work, gross margins, management team and other factors, the industry benchmark valuation for your business may be 4.5X EBITDA, for example. The three largest players in your industry may all be interested in the acquisition of your company and each one may submit an initial bid of, surprise, about 4.5X EBITDA. Since you are about to launch a new product or service you are looking for 6X EBITDA. The result is that we have a typical valuation gap between the buyer and the seller. This is the primary reason that many acquisition transactions do not happen. The seller is terribly disappointed and states that these buyers "just don't get it." The buyers have experience in making several acquisitions in their space and have their business valuation metrics pretty much in stone and think the sellers are being unreasonable in their expectations. So how is this situation negotiated? One of the most important roles of a business advisor on mergers and acquisitions is to devise a transaction value and structure that works for both parties. As a third party objective advisor, we establish alternatives with both buyer and seller to consider given their hard and fast valuation positions. Here are examples of a business sale transaction structure that could be a win for both buyer and seller: 1. Cash at Close which is approximately a 4X EBITDA multiple for the trailing twelve months. 2. An Earn Out (Additional Transaction Value) based on the selling company's sales revenue beginning in year one and ending at the end of year five. The earn out is at risk if not met, but is set to net the founders or shareholders a 6X EBITDA multiple on the current fiscal year projected sales. 3. Certain Assets (automobiles, domain names, etc.) were excluded from the sale and are to remain with the seller as they had specific value to the seller and minimal value to the buyer. 4. An Attractive Compensation Package, including stock options in the acquiring company, was negotiated on behalf of the seller for him/her to remain with the acquiring company for up to three years and possibly longer. 5. Specific Non-Compete Stipulations were negotiated out of the Non-Compete clause providing the seller far more flexibility in the future, as well as, other terms favorable to the seller while being acceptable to the buyer. It is critical that you seek professional help in this process. Most business buyers that approach a company with an unsolicited offer to acquire your company are bottom feeders and will attempt to buy well below the market. They will attempt to draw out the process and pursue several acquisitions simultaneously hoping that one or two sellers get consumed in legal fees, the idea of selling, or just cave and sell out at a discount. They may start out at a decent valuation, but as they go through their due diligence process will find one issue after another that makes them reduce their offer. They often throw out the term "material adverse change" in an attempt to justify their value reducing behaviors. Some business development directors get judged or paid bonuses on how much below the original offer they can ultimately close the deal. To stem this bad buyer behavior it is important to have options and manage your cash and your business prudently during the sale process. Whether you are considering buying a company or selling your business, it is critical to properly plan, research and get the needed advice. With over one hundred variables involved, a third party advisor with experience and expertise in negotiating will be the difference in achieving your goals. CEO Advisor, Inc. provides management advisory services, including mergers, sales and acquisitions to CEOs and owners of small and mid- size companies. Contact Us today for a free consultation.

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