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Our Goal: Maximize Value for Your Business
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Determining the value of a business is often a complex task. It is your best interest to have your business valued by one of our highly skilled and trained Professional Business Intermediaries at VR in Tampa or through our strategic network of qualified business valuation analysts for a Third Party Valuation. Click here for Professional Valuation Services. Before the market value of a business can be determined, the financials (profit & loss statement or P&Ls, and tax returns) must be recast to reflect the true earning power of the business.
Identify the “Right Buyer”.
Identifying the “Right Buyer” is one of the most important steps in placing value on your business. The range of values that different Buyers may be willing to pay may be staggering. Buyers pay for opportunity. The Buyer who perceives the greatest opportunity is the Buyer willing to pay the most for your business. Identifying the “Right Buyer” requires understanding the four main classifications of Buyers.
The Strategic Buyer: These are the very best Buyers. They almost always pay cash and buy at a premium. Typically public or very large private companies, their decision to buy usually revolves around considerations of economies of scale, new channels of distribution, new technologies or other integration considerations. To be attractive to 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
- Suitable management willing to stay
Private Investment Group/Sophisticated Buyers: This group of Buyers emerged as a force when the “merger mania” of the late 80’s ended and Buyers began to recognize the opportunities in the private sector. Lower interest rates have also spurred the growth of these Buyers by encouraging the information of investment groups whose purchases are made using a “schooled” approach. There are two distinct types of Sophisticated Acquirers and the acquisition criteria they use are as follows:
Private investment or holding company
- Revenues from $10 million upwards to $100 million
- Earnings of $1 million
- Investment of considerable cash or equity
- Pay 3 to 10 times EBITDA earnings
High Net Worth Individuals
- Revenues from $2 million upwards to $20 million
- Expect 6 figure future earnings
- Expect to leverage a part of the purchase
- Expect the Seller to finance part of the buy
- Pay 3 to 7 times EBITDA earnings
Cash Flow Buyers: By far the largest group of Buyers. Cash Flow Buyers are the most common Buyer for Main Street and small businesses. These Buyers tend to focus solely on present and past earnings and will not typically pay a price based on future earnings. The Financial Buyer is buying a job and will consider a price fair if the transaction meets the following criteria:
- A living wage typically commensurate with the initial investment
- A modest return on the cash investment
- P/E ratios of 1 to 4 times DE
- Seller financing
- A good fit with their skills and the opportunity to make the business better
Many small businesses are purchased by Cash Flow Buyers. VR Business Sales maximizes the amount the Financial Buyer is willing to pay finding the right Cash Flow Buyer for your business.
Industry Buyer: The Industry Buyer is the Buyer of last resort. If you have to sell, 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 won’t pay for it. The Industry Buyer typically will pay:
- Liquidation value
- Book value
- Adjusted Book Value
What is a fair price for a business?
Like any other product, a business is worth whatever a willing buyer will pay a seller in a free market. However, the value of most businesses is determined by what someone can afford to pay for it. Typically this price will be 2 to 3 times the annual cash flow of the business after recasting, with a 25 to 50 percent down payment and a note paid off over 5 to 10 years. If the business can earn the income and cover debt service, then it is worth the price.
Recast Financial Statements
Recast financial statements provide buyers with a common baseline to compare earnings from different businesses to each other as well as a way to calculate future earnings. Once the financials are recast your VR Intermediary will prepare a market valuation to determine the market value of your business.
What is Seller Discretionary Earnings (DE)?
DE (Discretionary Earnings) is a measure of the total financial benefit accruing to the owner of a business. We analyze the cash flow of each business to place it on an even footing with every business, no matter how the owner takes the profits out of the business. We usually define discretionary earnings as profit before income tax, depreciation, amortization, interest and owner's compensation and other owner benefits. This is the amount of money the owner has available to pay himself, to invest in additional equipment, to make the note payments on the business and pay taxes.
DE is calculated as follows (simplified):
+ Pre Tax Net income
+ Owner’s salary
+ “Discretionary expenses” or perks
+ Non-cash expenses (e.g. amortization & depreciation)
+ Interest expense
+ Non-operating expenses
+ Non-recurring or one time expenses
= DE (Discretionary Earnings)
What is Goodwill?
Goodwill is the difference between the total value of a business and the value of inventory, equipment and other "hard" assets. Every business has goodwill unless it is closed or failing badly. The amount to pay for goodwill depends on the cash flow of the business and its general attractiveness. If buyers did not pay for goodwill, sellers might as well sell off their equipment and close down rather than sell as an on-going business.
Call VR in Tampa (813)739-8722 to find out how; with Valued Representation through one of our Experienced Professional Business Intermediaries you can receive a free Market Valuation for your business or Click here to contact us