You’re an experienced business owner, not a magician. Crystal balls work for fortune-tellers, but not for the business owner who wants a realistic, factual answer on what his or her business is worth. The first step in obtaining that answer is obtaining a business valuation, and VR Business Brokers of Fort Worth/Arlington is poised to help you take that first step. Methodologies used to evaluate a business include the rule of thumb, a professional in-house evaluation performed by a qualified VR Business Brokers office, and a third-party valuation done by a professional appraiser. The specific methodology that is right for your business depends on the size of your company as well as other factors.
The rule-of-thumb evaluation is used for the Market Analysis Opinion of Value and the Value Analysis, which you can read about in detail in the Professional Valuation Services section of our website.
There are three ways to do a rule-of-thumb evaluation:
The first way, which is the most common and the least scientific way to do a rule-of-thumb evaluation, is to look the business value up in a book of values. The book of values is very generic and does not take into account location, profitability, goodwill, or any other factor that can have a potentially significant impact on the value of the business. For example, the book of values puts every restaurant, deli, or other food service business together and gives a generic range of prices. Sometimes those ranges can swing by as much as 30 percent.
The next method is to look at comps, similar to how real estate is transacted. The broker will look for similar businesses that have recently sold in your area and use those prices as a guideline. While far more scientific than using a book of values, the comp method does not involve reviewing financials, determining market drivers, discerning how the price was derived, learning how the business was financed or any other items specific to those businesses. Since these are key factors in determining the value of a business, this method is also not as accurate as it should be.
The third method used for a rule of thumb is proprietary to the VR network. We have access to an unprecedented amount of data through our database of business transactions, which includes all the data regarding each transaction. Rather than assume that all restaurants sell at x times earnings, we can look at similar restaurants, in similar markets, with similar sales and similar margins, and actually see what they sold for and how each transaction was structured. We then take that information and combine it with the information from the book of values and comps to come up with very solid, substantiated value for the business.
How do we do this? VR Business Brokers of Fort Worth/Arlington maintains a third-party agreement with a firm of professional business appraisers – the same appraisers who provide opinions of value for the country’s largest lending banks. The appraisal company we partner with specializes in analyzing and valuing small, privately held companies, just like yours, and maintains the largest database of comparable business sales in the United States.
You may be wondering why your CPA just can’t tell you how much your business is worth. That’s a great question, which many business owners ask. It boils down to the difference between how a CPA values your business and how buyers value your business.
Typically, your CPA gives you what is called "book value" for the business, which is a number based on your business financial statements. The catch is book value does not accurately reflect how much your business is worth because it does not consider such factors as goodwill, competition, market and industry growth, business expansion opportunities, changes in technology and much more. These factors contribute to your business value but do not appear on your financial statements. Consequently, the book value your CPA quotes you is almost always way lower than your company’s true market value.
In comparison, VR of Arlington’s extensive experience and access to the most comprehensive database of businesses sold in the U.S. allow us to give you an expert opinion of your company’s value. We deliver the valuation in a responsive, timely and efficient manner.
No one has worked harder than you to build your business. As you begin to consider selling your business, don't leave money on the bargaining table. Let our third-party opinion of value impress the buyer and maximize your return on the sale of your business.
The next step in understanding how the marketplace places a value on your business is to identify the most likely type of buyer for your company. Simply put, the buyer who perceives the greatest opportunity in owning your business is the buyer who will pay the most for your business.
To identify the right type of buyer for your business, you need to understand the four primary types of buyers and clearly grasp where your company fits into this world. The four main types of buyers include:
· The Financial Buyer
· The Sophisticated Buyer/Private Equity Group (PEG)
· The Strategic Buyer
· The Industry Buyer
Let’s take a closer look at each type of buyer.
The Financial Buyer. The financial buyer purchases the majority of small, privately held companies. Typically, these buyers focus exclusively on present and past earnings and will not pay a price based on future earnings. Financial buyers are looking for a return on their investment and are considering the business as a new career opportunity for them. They will consider a price fair if the transaction offers:
• A wage for the buyer commensurate with the initial cash investment
• A modest return on the cash investment
• P/E ratios of 1 to 4 times SDE (Seller’s Discretionary Earnings)
• Seller financing
• A good fit with their skills and the opportunity for them to make the business even better
By finding the right buyer for your business, VR maximizes the amount this type of buyer is willing to pay for your company.
The Sophisticated Buyer/Private Equity Group. In the late 80s, this group of buyers emerged when the "merger mania" ended and buyers began to recognize the opportunities in the private sector. With the market’s current low interest rates, more of these buyers have emerged. They often form investment groups whose purchases are made using a "schooled" approach. Sophisticated buyers fall into two distinct types, including:
· High-Net Worth Individuals, who look for companies with:
§ Revenues from $2 million to $20 million
§ Six-figure future earnings
§ Ability for the individual to leverage part of the purchase
§ A seller who is willing to finance part of the sale
The high-net worth individual is willing typically to pay 3-6 times the company’s EBITDA earnings.
The Private Equity or Holding Company, which looks for
companies with:
§ Revenues from $10 million upwards to $100 million
§ Earnings of $1 million or more
§ Investment of considerable cash or equity
Typically, the private equity or holding company is willing to pay 3-8 times your business’ EBITDA earnings.
Sophisticated buyers sometimes buy smaller companies that do not meet these criteria. For example, the sophisticated buyer might be attracted to a quick printing business or a light manufacturing business, either of which could be expanded to multiple locations with the right marketing and management.
The Strategic Buyer. These are the very best buyers who almost always pay cash and pay top dollar. Typically public or very large private companies, the strategic buyer usually bases the decision to buy based on considerations of economies of scale, new channels of distribution, market expansion, new technologies or other strategic integration considerations. To attract a strategic buyer, your company should fit most, if not all, of the following criteria:
• Sales in excess of $10 million
• Proprietary product or process
• Unique market presence
• Synergistic fit with the buyer's enterprise
• Suitable management willing to stay after the sale
Sometimes a business that does not meet these criteria can be the target of a strategic buyer. A good example might be a small business that an acquirer believes could be franchised or expanded into a chain of similar locations. At VR Business Brokers, we look for every reason that your business might be made attractive to the strategic buyer.
The Industry Buyer. If the strategic buyer is the best kind of buyer, the industry buyer is almost always the buyer of last resort. If you have to sell your company, the industry buyer is usually the only buyer you will attract. The difference between the industry buyer and all other buyers is the value of goodwill; industry buyers rarely pay for it. The industry buyer typically will pay:
• Liquidation value
• Book value
• Adjusted Book Value
Way too often, business owners trying to sell their businesses on their own argue, “Why can’t I do this myself? I know everybody in my industry.” Unfortunately, in nearly every situation, a sale to an industry buyer means a business sold at a deeply discounted sale, which means less money in the owner’s pocket.
To learn more about what your business might be worth, please visit the Professional Valuation Services page of our website.