One of the most important concepts for business owners to internalize is the difference between the business enterprise value (BEV) determined by your M&A advisory firm and what the ultimate selling price for your business may be.
The BEV is purely a financial estimate based on recast historic financials that are projected forward for five years. Typically these future earnings are discounted back at a discount rate based on the perceived risk associated with the company and its strengths and weaknesses. As the company grows (or shrinks) and as the economy and risk associated with the business change, so too does the BEV.
The ultimate selling price is determined by what a willing and informed buyer will pay for the opportunity to obtain the future earnings of the business, plus other factors driven by the “intangible assets” of the individual company. The value of these intangible assets will vary from buyer to buyer to buyer.
Some buyers will be more interested in your blue chip customer base. Others might find your prime location of greater value. Maybe it will be your internal processes and systems that set you apart. Some may find your long-term contracts with key suppliers at great rates the most important feature.
Each of these certainly is part of the reason you are succeeding and generating profits. However, in many cases when combined with the buyer’s strengths, the equation often equals the old synergy equation of 2 + 2 = 6.
For example, let’s say you have a great product you produce, but your sales and marketing is weak due to a number of factors. You have attracted a buyer who has a tremendous sales team that can now be combined with your remarkable products to create a win-win scenario.
Another example could be that you have created internal operating systems that allow you to have a pre-tax profit margin of 15% when the industry average is 10%. Buyers who are at (or below) the average will be interested in obtaining your business and replicating your efficiencies in their business model to improve their bottom line as well.
As you can see these synergies are unique from buyer to buyer. And ultimately are samples of why your BEV can be far different from the ultimate selling price of your company.
The real key to achieving an optimal deal is having a deal team working for you that is in constant communication and doing endless research on who is acquiring in your industry and more importantly WHY they are acquiring. One of the reasons Generational Equity has closed more transactions than any other firm in the lower middle-market is largely due to the quality of dealmakers on our team. Collectively they have hundreds of years of experience in closing optimal deals for companies across North America.
On top of this, they have access to unrivaled research sources including an internal database of over 30,000 registered buyers who have told us specifically the types of companies they are looking for and update these interests with us several times a year. It is these tools that very few M&A firms have access to.
Having skilled people and incomparable tools at our disposal allow us to look for buyers that see synergies that add value to the BEV of every client.
To learn more about BEV vs. selling price, you should set aside some time to attend one of our complimentary exit planning conferences. Whether or not you are thinking about selling your business just yet, I think you will find the information extremely beneficial as you consider your exit planning and timing. To learn more call us at 972-232-1121 or reach out to us on our website with any specific questions you may have.
And remember your BEV may not be what your ultimate selling price may be.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2017 Generational Equity, LLC. All Rights Reserved.
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
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