Do you know what hidden values may be overlooked by buyers and sellers of a business? Read on to find out.
If you know anyone who is thinking about buying or selling a business, we would be glad to assist them. Your referrals are appreciated.
Sincerely,
Bob Dale & John Austin
Austin Dale Group
512-327-0427
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The Hidden Values in a Business
Surveys have shown that a majority of business owners have no idea what their business is worth, that they have a majority of their net worth tied up in their business, and that they do not have an exit strategy. A business broker or M&A professional is a good person to call to get an idea of what the business might sell for in the marketplace.
Financial performance is certainly important in figuring what a particular business will bring in the marketplace. However, a broker or intermediary can also help buyers and sellers identify those hidden values a business may possess. It's these hidden values that often capture the interest of buyers and make a business more valuable than what the numbers suggest. Sellers should keep them in mind when placing a price on their business, and make sure that a prospective buyer is made aware of them. They might be called the non-financial value of the business.
Many business owners may take the following hidden values for granted, but they definitely add value to the business.
- Trained/Experienced employees: It's easier and less risky to take over a business that already has experienced workers rather than having to hire and train them from scratch.
- Unique products or services: Is the business known for something special? "They have everything!" "They have the best pizza in town." "They have quick delivery." "If they don't have it, they'll get it." What do people say about a particular business?
- Repeat customers or clients: Many businesses have to continually look for new customers or clients. A real estate firm sells a house and, in most cases, that customer stays there for years. A sale might lead to referrals, but barring something unusual, most people aren't going to buy a second house very soon. A convenience store, however, hopes to keep customers coming through the door on a regular basis. That repeat business has a value. It is one of the selling points in buying an existing business rather than starting one from scratch.
- Long-term agreements or contracts: For example, value is added by a three-year contract to maintain the landscaping for a large customer; a written agreement to maintain machinery and equipment for a set period of time; or a written agreement to be able to sell or represent a popular brand or product or service. For these to count, they obviously have to be transferrable to the new owner.
These are just a few of what might be termed the hidden values of a business. Others could be: well-maintained records, operating manuals and procedures, attractive and well-kept premises, secret recipes, mailing lists, etc. A business broker or M&A professional not only knows current market conditions, but can advise buyers and sellers on those hidden assets that just might make a business stand out from the rest.
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Increase the Selling Price
Following are some items that may not increase value, but may increase the price and attractiveness of a business. A business owner should:
- Create a list of fixtures and equipment with serial numbers, dates of purchase and any amounts owed against the items.
- Prepare a floor plan complete with equipment layout.
- Have copies of all copyrights, patents, special licenses, permits, etc.
- Have current financial statements -- that means current through last month, not last year.
- Make sure all leases are current and have at least five years left. If less than five years remain, the owner should extend the leases prior to the sale.
- Create an operations manual and an employee policy and procedure manual if they are not already available.
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BizBuySell.com Reports Slow, Steady, Increase in Business-for-Sale Transactions for 1st Quarter
Business valuation metrics decline even as business-for-sale transactions continue to rebound
San Francisco, CA - April 6, 2010 -- BizBuySell.com, the Internet's largest marketplace for buying or selling a small business, today released economic data for the first quarter of 2010 that suggests small business-for-sale transactions and valuations have continued to show signs of a slow but sure economic recovery.
According to the BizBuySell.com Insight Report data, the number of closed transactions reported to BizBuySell.com in First Quarter 2010 rose slightly, 0.3 percent, as compared with the same time period in 2009 -- from 1,146 transactions to 1,149. Market improvement is more evident when comparing First Quarter 2010 data to the prior quarter, with BizBuySell.com reporting a healthy 6.3 percent increase in transaction volume. Closed transactions are reported to BizBuySell.com by business brokers nationwide.
"Although the numbers are somewhat flat, the business-for-sale market continues to move in a positive direction, with each quarter since the Second Quarter of 2009 showing improved performance versus the year-ago period," says Mike Handelsman, General Manager of BizBuySell.com. "Motivated business sellers are increasingly able to get deals done at reasonable terms, and more business buyers are finding good value in the market at this time." |
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Corporate Growth Through Strategic Acquisition - part 3 in a series.
There are several categories of strategic acquisition that can produce outstanding results with effective integration of the businesses. Many acquisitions actually have elements from several categories:
3. Valuation Multiple Expansion: This is a subtle mathematical approach that private equity groups (PEGs) understand and use to make money. They buy or establish a platform company, usually in the range of $30 million to $250 million in revenues. Then they work to acquire several add-on companies. Buying other companies can add to the value of the platform company based on expanding their customer base, improving their technology, or broadening their product line. PEGs know that a small company will sell at a smaller valuation multiple than their larger platform company. Below is an example of how that might work for a company looking to grow through acquisitions:
Let's say that the acquiring company is $30 million in revenue and is looking to acquire a $5 million revenue company. The $30 million company with $5 million in EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) has a valuation multiple of 6 X EBITDA while the $5 million company with $1 million in EBITDA has a multiple of 4 X EBITDA. Pre-acquisition that would mean that the value of the acquirer was $30 million and the value of the target was $4 million. Theoretically, if you combined the two companies, the new value should be $30M plus $4M or $34M million. However, post acquisition, the combined company takes on the EBITDA multiple of the acquiring company resulting in a valuation of ($5M + $1 million in EBITDA) or $6 million X 6 or $36 million, resulting in an immediate gain for the acquirer of $2 million in value. Wall Street refers to this phenomenon as an accretive acquisition.
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