VR Has Sold More Businesses In The World Than Anyone.®
Considering Earn-Out Provision
By Peter C. King, VR Business Brokers/Mergers & Acquisitions, CEO
An earn-out provision is language in a purchase and sale agreement that commits the buyer to make payments to the seller if the business achieves agreed-upon financial targets following the sale. Earnouts also may be referred to as payouts or contingent payments.
Earn-outs are often useful when buyers and sellers can’t agree on a price or when the transaction is only possible if the seller finances a portion of the purchase price. The seller may believe the business has good financial prospects and merits a higher sale price, but the buyer is unwilling, or unable, to pay it.
To break the deadlock, the seller agrees to accept a lower payment at closing with a held interest and the promise of additional remuneration if the business meets certain financial milestones. The seller releases held interests as these remunerations are paid and may maintain rights to assets of the company if the buyer fails to meet a specified schedule.
Win-Win – Keys to Negotiating a Successful M&A Tool
By JoAnn Lombardi, VR Business Brokers/Mergers & Acquisitions, President
Whether you are buying or selling a business, a few guidelines can help you negotiate a deal more effectively and improve your chances for an advantageous outcome. While you’re probably already familiar with basic negotiation strategies, you likely use them on a daily basis while conducting business. Most parties to an M&A transaction can use a refresher course when it comes to what may be the biggest deal of their lives.
Good Negotiators start by knowing themselves. Before you enter into sale negotiations take time to identify your goals and your tactics for achieving them. If you’re buying, what’s your “reservation price”, the most you are willing to pay? Would you be able to walk away from the deal if the seller refuses to budge on price?
If you are selling, similar questions apply: What’s the lowest offer you will accept? Are you in a hurry to sell? What conditions will you require as part of the sale? For example, the retention of certain employees may be a priority. Also be prepared to speak confidently about your business’s strengths and address any perceived weaknesses. Since the buyer’s negotiating leverage emphasizes your weaknesses, you need to be aware of them and ready to provide a solution that mitigates an adverse effect on the buyer’s offering price.
Private Company Valuation Methods
There’s more than one way to value a company, and no one method is more accurate than another. The valuation exercise starts by utilizing multiple methods to narrow in on a number range. While intuitively it makes sense that all valuation paths lead to the same end result, the reality is that once the numbers have been crunched, a banker is most likely going to end up with a handful of independent, estimated values for a business.
That’s where the real work begins. A banker or valuation expert will look carefully at the ranges of valuation that different methods produce and use qualitative, subjective insight to distill a company’s various valuation estimates into a single range that makes sense. For each method of valuation, a variety of non-quantitative factors are considered and valuation is adjusted accordingly.
There are three major concepts to understand when it comes to some of the most common valuation methodologies:
1. Discounted Cash Flow
- The Discounted Cash Flow (DCF) business valuation model is a powerful tool grounded in a simple concept: the value of any given business is equal to the sum of all future cash flows of that business, discounted to reflect their value today. This valuation is only as good as the assumptions used to create the inputs. There is huge amount of discretion in projecting what a company’s business will look like for the next 5-10 years. When applying the DCF model to a private company, assumptions will be made about that company’s cash flow, discount rates, control premiums and illiquidity discounts.
Reasons Why Your Business Won’t Sell
By: Ryan Jorden, VR Business Brokers - Managing Partner
You’ve been thinking about selling your business for a while and now you’re finally ready to pursue a sale. But is your business prepared to withstand the scrutiny of a buyer and their professional advisors? If you haven’t been through this process before, then you may be unaware of some issues present in your business that a savvy entrepreneur is looking out for and seeking to avoid. These barriers to selling will undoubtedly show themselves during a buyer’s due diligence and likely derail your deal. So let’s take a look at some of the common issues that arise so you can start working on them in order to maximize your value in a successful sale.
1. You aren’t mentally prepared for the process
You thought you were ready, but now that you’re discussing it in depth with your trusted broker you realize that you have no plan for your life after the sale. Your identity and self-worth are very closely wrapped up in your business, or perhaps you’ve worked so hard at growing your business that you simply didn’t have much room for a social life or hobbies. What are you going to do with all of that free time? The great unknown looms large and you’re getting cold feet at the prospect of reinventing yourself.
This is an opportunity to draw up some goals and gain a clearer understanding of how your life will change and benefit from the sale of your business. Maybe you desire to spend more quality time with your spouse or grandchildren, finally enjoy some uninterrupted holidays, or pursue a completely different business venture. Write it all down and start filling in the blanks until you feel it becoming tangible. Because it’s crucial that you’re fully committed to the transition both emotionally and mentally.
If you’re on the fence, then your business will suffer in the meantime, your broker will get frustrated trying to drag you along and any buyer you meet is going to confuse your reluctance of selling with disapproval of them.
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