It has often been said that valuing companies is an art, not a science. When a buyer considers\u00a0the purchase of a company, three main things are almost always considered when arriving at\u00a0an offering price.<\/p>\n
Quality of the Earnings<\/strong><\/p>\n Some accountants and intermediaries are very aggressive when adding back, for example,\u00a0what might be considered one-time or non-recurring expenses. A non-recurring expense could\u00a0be:<\/p>\n The argument is made that a non-recurring expense is a one-time\u00a0drain on the \u201creal\u201d earnings of the company. Unfortunately, a non-recurring expense is almost\u00a0an oxymoron. Almost every business has a non-recurring expense every year. By adding\u00a0back these one-time expenses, the accountant or business appraiser is not allowing for the\u00a0extraordinary expense (or expenses) that come up almost every year. These add-backs can\u00a0inflate the earnings, resulting in a failure to reflect the real earning power of the business.<\/p>\n Sustainability of Earnings<\/strong><\/p>\n The new owner is concerned that the business will sustain the earnings after the acquisition.\u00a0In other words, the acquirer doesn\u2019t want to buy the business if it is at the height of its earning\u00a0power; or if the last few years of earnings have reflected a one-time contract, etc. Will the\u00a0business continue to grow at the same rate it has in the past?<\/p>\n Verification of Information<\/strong><\/p>\n Is the information provided by the selling company accurate, timely, and is all of it being made\u00a0available? A buyer wants to make sure that there are no skeletons in the closet. How about\u00a0potential litigation, environmental issues, product returns or uncollectible receivables?\u00a0The above areas, if handled professionally and communicated accurately, can greatly assist in\u00a0creating a favorable impression. In addition, they may also lead to a higher price and a quicker\u00a0closing.<\/p>\n\n