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Competitive Factors in Privately-Held Companies
The following factors may have a significant impact on the value of a privately-held company, but they are normally not applicable to the value of a publicly-held firm. Most of them are stand-alone factors that have to be taken into consideration by a prospective purchaser, especially a strategic one. Most are eliminated if the subject company is acquired by a public company or a much larger company. However, when this is not the case, these factors will come into play. They should be considered by buyers and, of course, sellers in considering or setting the price of a business.
- Lack of access to capital
- Ownership structure and stock transfer restrictions
- Company's market share and market structure of the industry
- Depth and breadth of management
- Heavy reliance on individuals
- Marketing and advertising capacity
- Breadth of products and services
- Purchasing power and related economies of scale
- Customer concentration
- Vendor and supplier relations
- Distribution capability
- Depth, accuracy, and timelines of accounting information and internal control
- Condition of facility and upcoming capital expenditure needs
- Ability to keep pace with technological changes
- Ability to protect intellectual property
- Increasing threat of foreign competition
- Litigation, environmental concerns, and adverse regulatory issues
Source for list of factors above: Valuation for M&A, 2nd edition, by Mellen & Evans, published by John Wiley & Sons.
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Business-for-Sale Market Improves in Q4
BizBuySell.com reports that the business-for-sale market is seeing moderate but steady improvement. The total number of closed transactions reported by business brokers in 2010 increased 3% over 2009. This was largely spurred by a strong fourth quarter, which saw transactions up 11% compared to the fourth quarter of 2009. However, this increase was accompanied by a decrease in valuations. Sellers seemed to be more realistic about the value of their businesses in 2010, dropping asking prices to get deals done. The median closed-transaction sale price for 2010 declined 6.3%. Key valuation metrics also fell slightly with the average revenue multiple down 2.1% and the average cash flow multiple down 0.6%.
The overall increase in closed transactions follows a year-long trend reflecting a slow, but steady, economic recovery. BizBuySell.com projects that this trend will slowly accelerate in 2011 citing improving industry drivers, including increased supply and demand. As the economy improves, business owners who hesitated to sell in the midst of a recession should see their business performance strengthen and be more willing to sell. Also, an above average number of small businesses should come to the sale market as U.S. baby boomers start to retire. Simultaneously, national business brokers are reporting a growing number of buyers - many of whom are laid-off corporate workers looking to the opportunity of entrepreneurship - seeking to purchase a business while prices remain relatively low. Finally, recent federal legislation that provides community banks with capital earmarked for small business lending should encourage banks to ease lending restrictions and provide more of these buyers with necessary capital.
BizBuySell.com, the most popular online marketplace for business-for-sale listings, receives closed-sales data from business brokers around the country. |
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Some Observations from a Veteran Business Intermediary
- Businesses that fail all have one thing in common - they have all run out of cash.
- The time to get nervous is when someone says, "It's a done deal."
- If asked what a business is worth, the question is, "Are you a buyer or a seller?"
- Companies that need help from a business intermediary the most are the ones that are the least willing to pay for it.
- The bigger the deal, the more likely it will close successfully.
- Valuation is always relative.
- If a deal looks too good to be true, it most likely is.
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Free Webinar this Week
 Owners and senior managers should always be working to increase the value of their company, whether or not they are thinking of selling or merging. Join us for our next webinar: "Ten Ways to Increase the Value of your Company"
Date: Thursday, Feb. 17
Time: 11 AM Central
Click to register, seating is limited.
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