 Welcome to our July newsletter. In this issue we feature articles about how business intermediaries determine a listing price for a small to medium sized business, and some areas for owners to consider to add value to their businesses. One of us (John) recently attended a week-long NACVA valuation training class. We're continually growing our knowledge and tools to be able to serve our sell-side and buy-side clients even better. If you know anyone who is thinking about buying or selling a business, or needs to have a preliminary valuation to start the process, we would be glad to assist them. Your referrals are appreciated. Happy Independence Day!
John Austin & Bob Dale
Austin Dale Group
512-327-0427
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"How Much is My Business Worth?"
This is the most often asked question by business owners when a business intermediary asks them if they are interested in selling their business. Often times, it is also a no-win question. If the suggested price is too high, the seller may be satisfied for the moment, but that satisfaction will end when the business fails to sell for the inflated price. On the other hand, if the suggested price is too low, the intermediary may be promptly escorted to the door.
So, how does the business intermediary come up with a price? The business intermediary will generally review the financials and add back certain items. This is often referred to as "normalizing" or "recasting" the financial statements. This is done by pulling out the non-cash deductions such as depreciation, interest, amortization and taxes (if shown on the statement) and either adding these amounts to profit or subtracting them from a loss.
The resulting figures are commonly referred to as Earnings before Interest and Taxes (EBIT) and Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA).
For smaller businesses (for example, under $3 million in sales), the figure most often used to determine the sale price for a business is Seller's Discretionary Earnings (SDE). This is essentially EBITDA plus the seller/owner's benefits and salary/earnings.
Once the SDE, EBIT, or EBITDA figure has been established, it is often multiplied by a multiple to arrive at a recommended asking price. A multiple is a simple term used in place of more formal terms in finance such as "return on investment" or "capitalization rate".
The numeric values used as a multiple of SDE can range from 1 to 4 or more. Typically, a small business (under $1M revenue) will sell for between 1.8 and 2.5 times SDE although many businesses can fall under or over. Larger businesses can range from 3 to 8 times EBIT or EBITDA, but again can fall much lower or higher depending on the business.
While the process above creates a good starting point, it is important to remember that the price of a business is ultimately determined by what someone is willing to pay for it. In other words, price is determined by the marketplace. So if you are thinking of selling your business, perform a reality check by asking yourself "What would you pay for your own business?". |
Questions to Uncover Areas to Add Value in Your Business
Are you diversified?
A major problem with small companies is that their business is often focused on one or two major customers or their inventory comes from only one supplier. A rule of thumb is that no more than 10 percent of one's business should be derived from one customer. Expanding to new markets, adding new products, or finding new customers without deviating too far from the business's core activities helps to build value.
Is there an area where you need to change course?
A big advantage of small business is its ability to quickly change direction, to rapidly react to changes in the economy or the marketplace, and to take advantage of new opportunities. Now may be a good time to evaluate any changes that need to be made.
How is your documentation?Paperwork is not usually high up on the list of things to do for small business owners. Yet, the value of a business could depend on proper paperwork. Are contracts signed and available? Are the books and records up to date? Are all company agreements in writing? Are your assets protected? Many small business owners fail to trademark the name of a service, product or anything else specifically unique to their business. Proprietary written material should be copyrighted. If the name of the business is unique or important, it should be registered. Check Walt Disney or Kleenex - both have a small ® behind it showing that the name is registered. Secret recipes, brand names, etc. should be registered, copyrighted, trademarked, etc. - they are all part of building value. Are you operating "lean and mean"? Many larger companies outsource their logistical needs, their accounting, the sale of their products - even their manufacturing. Many smaller businesses outsource their accounting, their payroll, and their legal work. Outsourcing can allow small businesses to focus on what they do best. All of the above questions can help a business owner discover ways to increase the value of a business. Small business owners should keep in mind that creating value is critical to the long-term (and short-term) success of the business. And, sooner or later, most business owners decide to sell their business or transfer ownership in some other way. |
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Did You Know?
Austin Dale Group offers a monthly financial coaching package for IT and other technical service businesses to help your company stand out and optimize your value. ValueTrack is built around a financial dashboard that helps you monitor your financial performance and share critical issues with your team. This improves your management effectiveness, even if you don't have an accounting background.
If you're thinking of selling your company now or in the next few years, it requires planning if you want to maximize the proceeds. It's important to prepare your business so that it's attractive to the right buyer at a healthy valuation. Some of the key areas that will affect your value are your financial ratios and earnings per employee. We'll help you focus on improve those and other areas in your business.
Contact us at 512-327-0427 or bdale@austindalegroup.com for a complimentary assessment to see if ValueTrack is right for you, or go to http://www.austindalegroup.com/services/valuetrack-financial-dashboard-coaching.aspx for more information.
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Next Webinar: "Planning Your Exit"
What's your exit strategy? Or is running your business taking up all of your time, leaving no time to prepare for your exit? Learn how successful entrepreneurs do it the "right" way each time they build a business - and profit from their experience -- even if you don't have immediate plans to leave your business.
Unless your business is a hobby and you aren't worried about your financial security, it's critical for owners to know why building your business as though you're going to sell it someday is the right way to do it. Regardless of where your business is in its life cycle, you have nothing to lose and much to gain from learning more about planning your exit.
Date: Aug. 29, 2012 (Wed.)
Time: 11 AM - 12 PM Central
Audience: Business Owners
Click to register, seating is limited:
https://www3.gotomeeting.com/register/761327878
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Two Pricing Challenges
1. What should be added back?
When normalizing a financial statement, it is easy to get carried away. After all, the more items that are added back, the more profitable the business appears. It's easy to add back the cost of a new roof for your building or new signage on the basis that these are one-time expenses. However, an operating business always has some expenses like these each year and to add each and every one of them back as "one-time expenses" can be quite misleading.
2. What's the right multiple?
Likewise, the multiple can be very subjective. It is created by weighing and assigning a numeric value to such areas or factors as location, number of years in business, industry trends, sales trends, competition, or even such factors as the length of lease remaining, whether the owner will finance the sale and the reason for sale. In larger businesses, management stability, customer concentration, and geographic distribution are also considered. There is a large body of knowledge in finance and valuation that should be considered in arriving at the risk-adjusted capitalization rate, and hence the multiple.
A business intermediary can provide assistance in selecting which items to add back and what multiple to use in order to create a realistic listing price for a business. |
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Texas M&A Deals Down in 2012
Texas saw a decrease in the number and value of merger and acquisition deals in the first quarter of 2012, a new report shows. Texas' 62 M&A deals in the first quarter was the lowest volume of deals since the first quarter of 2009, The Mergermarket Group reports. All data is based on announced transactions over $5 million as of April 11, 2012. (Austin Business Journal 4/18/12) |
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Systems & Info Management Claim 61% of IT Services Investments
Since the beginning of 2011, venture capital investors have invested in 57 companies primarily involved in the IT Services industry, according to PitchBook. Financings of companies that specialize in Systems & Information Management (including cloud computing) have accounted for the majority of these deals, with over 61% of the total deal flow. Consulting & Outsourcing composes 27% of IT Services deals. |
Seller Tip
Know your bottom price and terms.
Sellers should know what their lowest price is that they will accept for their business before they put it on the market. This is also true for the minimum amount of cash (down payment) they would be willing to accept. |
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Contact Us
Austin Dale Group
512-327-0427 info@austindalegroup.com
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