Influencing the Value of Your Company
Stephen Goldberg, a member of EO New Jersey, is the managing director of Sun Mergers & Acquisitions LLC, which provides advisory services on sales, mergers and valuations for privately held companies. In addition to his work as a Certified Business Intermediary, he is a frequent lecturer and writer on M&A issues and an Accredited Senior Appraiser with the American Society of Appraisers.
Although every business has its own set of circumstances, buyers typically evaluate potential acquisitions in a similar manner. Based upon my experience in the marketplace, the following are the major factors considered by prospective acquirers when determining a company’s worth and the ways in which you can help them reach the “right” decision regarding the value of your company.
With rare exception, a company’s recast pre-tax earnings influence valuation more than any other factor. Buyers are looking to purchase a stream of income that will provide a desired return on investment and justify the purchase price, so most commonly accepted valuation methods primarily rely on multiples of earnings. The stronger the earnings, the greater the value. Given this reality, it is critical that a seller present financial statements in a format that will maximize the earnings in the eyes of the acquirer.
Tangible assets have a positive influence on value. The greater the asset value included as part of a transaction, the greater the overall company value. But, 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. 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 future opportunities against 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. Although each risk 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.
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 or sales and marketing of complementary products and services that afford new markets and customers to each company. The key is to identify potential acquirers who 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, cost and availability of outside debt capital and 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.
Deal structure can also 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 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.
Presentation and Packaging
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 a CPA, lawyer or business partner 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 acquirers.
Do your research. Be prepared. Get what you’re worth.