Our goal at Morgan & Westfield is to provide you, our readers, with high quality information and valuable resources to help you navigate through the process of buying or selling your business. In this section, we provide interviews from various professionals somehow involved in the process of buying or selling a business.
Tina: As a seller, what should I do to prepare my business before listing it for sale?
T.J.: First and foremost, I always suggest that the Seller have financial statements prepared, at least, on a quarterly basis . One of the first things a Buyer is going to want to see are financial statements and not just the tax return, because the tax return typically has atypical expenses included ( depreciation , 50% of meals and entertainment, etc.). Second, is to have some sort of sales price in mind; whether you have a business valuation conducted, or just have something in mind, take the time to think about a price. Lastly, of course, as a business valuation professional, I highly recommend contacting a valuation professional who can give you an estimate on the value of the business.
Tina: Does revenue or earnings have a greater impact on the value of my business? Should I focus on pumping up the revenues or should I only focus on the profitability of my business?
Randy: If this were the mid-to-late 1990s during the dot-com boom, it would be all about revenue growth. Investors knew the Internet was big so it was all about capturing market share in the theory that earnings would catch up. In fact, it was as if there was something wrong with your model if you were profitable. Since then, there have been several periods of “flights to quality,” meaning there are more important things than revenue, such as scalability and margin improvement. For example, ask yourself, “If I grow revenue, will I be able to provide my product or service more inexpensively?” In other words, buying 100 widgets to sell might cost you $10 a widget, while buying 1000 might cost you $7. This is economies of scale (assuming your selling price does not come down commensurately).
Tina: Can I get a premium value for my business?
Brian: Companies are sometimes acquired for a premium price over-and-above the fair market value of the business on a stand-alone basis . These premiums typically reflect anticipated synergies and cash flow enhancements that a strategic buyer (oftentimes a competitor, customer, or vender) believes it could achieve. Examples of synergies include reduced materials costs, elimination of redundant overhead, or enhanced revenue through an expanded product line. These factors may result in a business that is worth $10 million on a standalone basis being acquired for $12 or $13 million, for example. These synergies are often buyer-specific, so it is difficult to predict what premium may be achievable without knowing the specific buyer.
Tina: What are the top mistakes that sellers make when setting a price for their business?
Elliott: I am more in the business of determining the price of a seller’s company using industry and professional standards than I am a broker advising a seller on the appropriate price to set. Professional standards require that I apply the appropriate measure and premises of value based on the situation at hand. However, business owners I have encountered normally think the business is worth more than it is. This is likely the result of a long-term endearing relationship with the business and a sense of pride because of it. Although this attachment is not unexpected, it does not consider things such as discounts for lack of marketability or adjustments for liquidity deficiencies.
Tina: How involved should my CPA be in the process of selling my business?
Matt: The seller’s CPA should be involved in every step of the potential transaction. Initially, your CPA can review the potential buyer’s financials to make sure that they are qualified, or that they are a legitimate buyer. Once a buyer is qualified, your CPA can facilitate the information gathering process, all aspects of the due-diligence phase, negotiation, and the deal structure to minimize the tax consequences of the transaction. All this is necessary in order to allow the business owner to continue normal business operations without disturbing growth or company moral.
Tina: How involved should my CPA be in the process of buying a business? At what point in the process should I hire a CPA?
Sam: It is essential that a buyer enlist the advice and counsel of their CPA, even before the decision has been made to acquire a business. The CPA can help you explore financing alternatives, identify strategic acquisition candidates, and address tax ramifications. The CPA knows what opportunities and pitfalls to look for that are specific to their client, and along with the rest of the transaction team, can help the client structure the transaction in a way that will both maximize investment return, and help the client manage a multitude of risks. The acquisition of a business is a major transaction that needs to be considered in your overall tax and financial planning, and it is your CPA that generally knows your specific tax/financial position, and can therefore provide invaluable guidance in this area. The CPA can also perform due diligence and analysis designed to identify potential financial reporting irregularities...
Tina: How will I know when it is a good time to sell my business?
Rick: If your primary goal is simply to get the best price, watch two things: market multiples and what’s going on in your industry. Published data on market multiples show history and current levels. The market is strong right now, recovering from the low point following the recession. Developments in your industry will also influence price. Some industries grow hot and cold and don’t necessarily follow overall market pricing trends. For example, one of the hottest industries right now is raw food processing. All of this assumes your business is actually positioned to sell. There is a long list of readiness issues such as successor management, customer concentration , internal systems and controls, and facilities condition and capacity, to name a few. How will buyers view your company? If you’re not sure of the answer, it’s probably not time to sell.
Tina: Do I need a CPA to help with due diligence if I am buying a business?
Scott: Absolutely! A CPA is trained to look for the specific characteristics that give value to the business, the intangibles that are transferable to you as the buyer, and the red flags (the warts of the business the seller is likely trying to cover up).
Tina: How involved should my CPA be in the process of having my business appraised? Is it necessary to let them know I am appraising my business?
Russell: While the company’s CPA is a knowledgeable financial professional, only people with the appropriate training, education and experience in valuing a closely held business should be valuing the company. The CPA can be very helpful to the appraiser in gathering and interpreting the required information.
Tina: How can I get a premium value for my business?
Philip: The value of a business is equal to the value of the cash flows expected to be generated by the business discounted at a rate sufficient to justify the risk involved in generating those cash flows. To increase the value of your business, you can either increase the cash flows that the business is expected to generate, or decrease the perceived level of risk necessary to generate those cash flows, or both. To increase the anticipated cash flows, you can either increase revenues, decrease expenses, or both. To increase revenues, you can get new contracts, increase marketing, upsell to your existing customers, sell related products or provide related services to your existing customers, increase your hours of operation, or take a variety of other actions. Some business owners reduce the taxes they pay by reporting less revenue than they actually achieve. That may feel good while they are doing...
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