Many business owners don’t want to spend the time or money to learn their company’s true market value. Some believe it’s too difficult or they don’t have the right skills or resources; others think they already have a pretty good idea of what their companies are worth — but they’re usually wrong.
Find an Advisor
Determining market value requires extensive market research and financial analysis to reveal a company’s future potential under new ownership. Since most business owners sell only one business in their lifetime, a professional, experienced mergers-and-acquisitions advisor can help by providing a valuation that gives an owner confidence when approaching and negotiating with prospective buyers — or talking to a lender.
If you do less than $1 million in volume, look for a business broker or an accountant who specializes in mergers and acquisitions. (You can find them by consulting the International Business Brokers Association.) In addition, you’ll want a good investment banker and an attorney who handles mergers and acquisition on your team. Your advisor can probably provide referrals to locate these professionals.
Once you’ve located an advisor, broker or accountant, don’t expect him or her to do all the work. The key to obtaining a “full” valuation is to understand everything good and bad about your business, and to anticipate how this information will be received in the marketplace.
Study Your Financials
The process usually begins with recasting financial statements of your business — typically the past three years’ balance sheets, income statements and statements of cash flow. Recasting includes extracting information that lenders, investors and potential buyers want to see; eliminating certain expenses and extraordinary items used by private, owner-managed companies to define tax benefits; and making other adjustments to conform with Generally Accepted Accounting Principles (GAAP).
These adjusted financial statements offer potential buyers a normalized view of the company’s past performance; they provide a basis for making judgments about the company by showing how it operated over a given period.
Remember, however, that buyers are buying for future, not past performance. Adjusted historical financials help you build pro forma financials, which look five years into the future and are the foundation of market value. Pro forma financials require extensive market research to determine reasonable, supportable assumptions about revenue and profitability trends, growth rates, market dynamics and other factors.
Study the Market
If it isn’t economically feasible to hire a market research firm, do your own research by examining trends in the industry, studying your competition and reading industry publications and general business-related periodicals.
Identifying and examining intangible assets is also integral to the valuation process. These include a loyal customer base, patents and licenses, supplier contracts, trade secrets and many other attributes that add value to the company but aren’t necessarily represented in the financial statements.
Combining all of these elements — adjusted historical financials, reasonable pro forma financials and intangible assets — reveals a company’s future potential and establishes a range of what informed buyers will likely be willing to pay for the company.
Armed with a perceptive, comprehensive valuation of his or her business, an owner can then enhance the value by increasing sales and marketing efforts, investing in cutting-edge technology, divesting an underperforming division or adjusting the capital structure. That in turn provides leverage at the negotiating table and increases the likelihood of receiving an attractive price for the company — or funding for future ventures — regardless of market conditions.
David L. Walker is president of RSM EquiCo’s Professional Services Group, which conducts research and analysis for client companies to determine accurate valuation ranges. Based in Costa Mesa, CA, the company specializes in mergers and acquisitions, divestitures and corporate finance for private middle-market businesses and is part of RSM McGladrey Business Services, a business segment of H&R Block. For more information, contact Gerry Gacek, senior vice president, at 888-900-0411.
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