Influencing Business Value
every business has its own unique set of circumstances,
buyers typically evaluate potential acquisitions in a similar
manner. Based upon our experience in the marketplace, the
following are the major factors considered by prospective
acquirers when determining a company's worth.
rare exception, a company's recast pre-tax earnings influence
valuation more than any other factor. Viewed in the simplest
manner, buyers are looking to purchase a stream of income
that will provide a desired return on investment and justify
the purchase price. Consequently, most commonly accepted
valuation methods primarily rely on multiples of earnings.
It follows that the stronger the earnings the greater the
value, all other factors remaining equal. Given this reality,
it is critical that a seller present the financial statements
in a format that will maximize the earnings in the eyes
of the acquirer.
Tangible assets have a positive influence on value. Generally
the greater the asset value included as part of a transaction,
the greater the overall company value. However, since earnings
typically have a greater impact on valuation than assets,
increases and decreases in asset values rarely have a dollar-for-dollar
impact on company valuations.
example: assuming there is equipment valued at $400,000
included in a transaction, increasing the amount of equipment
to $500,000 may slightly elevate the company's value but
considerably less than the $100,000 difference. Large sums
of required capital assets may actually be viewed as a "liability"
to certain buyers as they generally require larger future
investment to replace or maintain these assets, diminishing
future available cash flow.
To clearly determine a company's value, buyers must weigh
the future opportunities against the perceived business
and economic risk. Elements of the business that increase
risk decrease the value of the business. Conversely, elements
that decrease risk increase value.
Examples of risk factors that influence valuation include:
industry life cycle; industry stability; customer base concentrations
or dependencies; supplier dependencies; product or service
differentiation; strength and size of market; management
quality and depth; employee dependencies; impending regulation;
new technology and many others. Although each of these risks
is unique, they all have one common trait - an ability to
either reassure or cast doubt on the predictability of future
cash flow. As a result, the better a business can control,
offset or properly present these potential risks, the more
positive the impact on valuation.
The Right Acquirer A company can have a significantly greater
value to one acquirer than another. Much of the perceived
value derives from the company's strategic fit with a potential
buyer. Strategic value can be achieved through cost synergies
(i.e. elimination of duplicate expenses and reduction in
cost of goods) or sales and marketing of complimentary products
and services that afford new markets and customers to each
company. The key is to identify potential acquirers that
should have the most to gain from a business combination.
Price and terms tend to have a negative correlation. For
example, an all cash transaction will generally yield a
lower price when compared to a transaction that includes
owner financing. The better the terms offered to a buyer,
the higher the price that can be paid to the seller. This
primarily relates to cash flow, the cost and availability
of outside debt capital and the risk associated with completely
"cashing out" the business owner at closing. The
key is to identify the right combination of price and terms
that creates a "win-win" for both buyer and seller.
Many deal structure factors in addition to price influence
the total financial yield to a seller. Will the transaction
be an asset sale or a stock sale? Will the seller receive
continuing perks and fringe benefits? Will the seller retain
certain assets (i.e. receivables, cash, deposits, etc.)
rather than include them as part of the transaction? Will
the seller be willing to structure an earn-out for a portion
of the transaction? These and many other alternative transaction
allocations and structures will have a direct impact on
tax implications and total yield to the seller.
When buyers evaluate a business opportunity, they expect
the records and facts to be properly organized and documented.
A professionally packaged business will greatly increase
a buyer's confidence and comfort level, thereby increasing
the likelihood of a successful sale. Most buyers enlist
their CPA, lawyer or business partners to provide feedback.
These educational presentation packages keep everyone on
the "same page". You have spent years establishing
name recognition, market niche, vendor relationships, operation
and production systems, management, personnel, distribution
channels, customer loyalty, expansion opportunities, synergies
and numerous other intangible business assets. This is a
story that needs to be properly presented to potential buyers.
A professional intermediary can present the best possible
picture of the entire business, thus maximizing the attractiveness
and perceived value of the firm in the eyes of potential