When (Not If) You Sell Your Business

nospam@example.com (Robert H. Diefenbacher) — Mon, 01 Sep 2008 14:05:36 -0400

Every business comes to an end. It may be in less than five years (90% of the startups fall in this group), or it may be after decades. When it comes about either by choice or by chance, you need to be sure you are representing the best value picture you can. This does not mean doing anything that is not credible, but it does mean making sure the buyer considers everything that represents value to him.

Proper packaging of your business is critical to getting the most value. The IRS says “Valuation of securities [your business] is, in essence, a prophecy as to the future and must be based on facts available and the prospective economic conditions as of the valuation date.” –IRS Revenue Ruling 80-123.

A buyer’s perception of value begins with an analysis of your market. What are the demographics and how do you stack up against your competitors? Then the buyer will perform an internal analysis of your business to see what value enhancers he can find, and to determine the risk considerations necessary in the deal.

Next, the buyer will consider your restated financial statements. These are statements that supplement your audited, three-year historical statements. They recast your past three years to adjust for items that the buyer might not expect to incur. They include an assessment of profitability and cash flow and include both a P&L and a balance sheet. Each adjustment you make in recasting needs to be detailed.

Based on the past, you also need to prepare projected statements that demonstrate the potential you see for the business. What you are trying to do is give the buyer a credible picture through documents of what your business was, what it is today, and what it can be. Geneva Companies (an M&A firm) determined that a selling price (on average—with an admittedly wide variation) was determined based on 25% of book value and 75% of future earnings. So the pro forma statements, supported by a credible vision and a balanced perspective, are critical to building the value in your business.

The ROI to the buyer is made up of more than numbers on the pro forma, however. An astute seller will supplement the numbers with some professional, high quality research that shows where value will lie. Add to this a strategic plan and identify value enhancers. There are often aspects of a business that do not explicitly show on the statements. These can include such things as trade secrets, customer lists, patents, existing strategic relationships, research and development projects, trademarks, etc.

As a seller, your task is to explain the past and sell the future. Buyers respond to a documented, believable future. The current market may be more of a buyer’s market than we have seen in the last 10 years. Regardless of the reason you are selling your business, you may be doing so in a buyer’s market. To get the greatest value for your business you need to know what the business is worth, you must provide good documentation, and you need to seek the services of an intermediary. The goal of the intermediary will be to help you sell your business at the best price possible. Bringing multiple buyers into an auction is the best way to achieve this.

And always remember what Dr. Peter Drucker said: “The buyer rarely buys what the seller thinks he’s selling.” That’s not an excuse to "wing it." Instead, it is the reason to do the complete job when you prepare your business for sale.

Denbrook Strategic Advisors BlogSpot - Selling Your Business

When (Not If) You Sell Your Business