Quite often we meet with potential clients in our fact-finding, initial discovery phase who ask us, “Can you give me an idea what my company is worth?” Naturally, as any professional M&A firm would do, we indicate that without a thorough and complete evaluation of the business, we have no idea of what the company could be worth. Although this does cause us to lose some clients, it is the truth: No reputable M&A advisor should give you any idea how much your company is worth before doing a complete evaluation.
Your next question is probably, “OK, so why is it so important to value a company for acquisition in the first place?”
The answer is simple: Until Generational Equity conducts our valuation of your business, we have no idea what its true profitability is; and if we don’t know that, then we have no idea what future earnings your company will produce going forward. Keep in mind that buyers will review your past, but what they really are buying is the future profitability of your company.
How does Generational Equity determine your true earnings? First, we take your financial statements (preferably at least three years worth) and we determine how “clean” they are. That is, we need to have financial statements that are at a minimum in standard GAAP format (Generally Accepted Accounting Principles) and not jotted down on the back of a napkin.
It is amazing how often we encounter sizable companies that are still using antiquated methods of tracking key financial information. When we are approached by companies like this, we often encourage them to take the time and make the investment necessary to come back to us with financials that are at least created by an accountant using GAAP. Although this may delay the start of your evaluation by a few months, it will ultimately help you find an optimal buyer.
Assuming you have clean financial statements, once you engage us to conduct the evaluation, we send you a document full of questions that are designed to do two things:
The 20-30-page survey we send you can be daunting for some business owners. Not to worry, our evaluation pros are more than willing to walk you through the form and get you started on answering the questions. But make no mistake, the questions we ask are really just preparatory questions for the types of things that buyers will ask you later in due diligence. The time you spend up front with our analyst working diligently to cover these items will only help us when negotiating on your behalf later with buyers.
One of the key steps of our proven evaluation method is then to take the info you have provided us in your historical financials and our worksheet and then do what is commonly called “recasting.”
Most business owners have no concept of recasting, so don’t be embarrassed if you fall into this group. Recasting is the approved GAAP process when non-business related expenses are removed from your income statement and/or balance sheet to show the company’s true profitability.
Let’s be honest, you and your accountant have worked hard over the years in legitimate ways to understate your profitability. You may be unaware or even forgotten how the IRS has allowed you to legally suppress your profits. Many clients have lots of items that we can recast such as:
I could go on and on with this list. Essentially we want to show the true historic financials with all of these items removed. Why do we do this? Because if we don’t, the starting point of your five-year forecasted income statement and balance sheets would not be accurate, enabling buyers to legitimately underbid for your company.
Once we have recast your historic financials (this process can take anywhere from 2-3 weeks to several months depending on your availability and how clean your financials are), we then work with you to develop a credible revenue and profitability forecast for your company. We call this a “five-year pro forma.”
As mentioned, buyers will review your historical growth and will want answers for any fluctuations in the trend (either up or down). But what any professional buyer is really buying is not what your company has done in the past or the strength of your balance sheet today. No, what a buyer is really buying is the opportunity to earn and retain the profits shown in your five-year pro forma.
Again, this sounds more daunting than it really is. Our professional evaluation team has decades of experience working with business owners just like you to develop a forecast that is achievable, and from there, to develop defendable profit and loss statements that form the core of your evaluation.
Once the recasting is completed and an agreed upon pro forma is finalized, our team then determines which of all the various valuation methods out there are most credible for your company and industry. This is where the real “art” of valuing a business comes in, because there are a number of methods that can be used such as:
This is just a sample – there are a number of other methods used as well, many that can be unique to your industry and/or situation. The reality is, our team will typically look at 4-5 models in determining value and then use the one that is most defensible in the market. As you can imagine, developing the skillset to do this takes years. Fortunately our evaluation team is second to none in our industry in terms of experience and creativity in determining a company’s value.
That, in essence, is how to value a company for acquisition. In a thousand words or so I have covered what normally takes just part of a full day in a Generational Equity M&A seminar. If you are interested in learning more about our award-winning process, I encourage you to attend one of our complimentary, no-obligation M&A meetings entitled “How and When To Exit Your Company for the Most Profit – a Planned Exit Strategy.”
While at the seminar you will be able to visit one on one with our M&A professionals, who can discuss your specific situation and needs. But don’t expect them to tell you what your company is worth in that initial meeting. Remember, we need to do a full evaluation first.
To learn more please call us at 1-972-232-1121. If you decide not to work with us, please use a professional firm to represent you and avoid anyone who indicates that they can “value” your firm in any initial meeting.
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
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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
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.
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
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
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
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.
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.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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 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
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 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
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.
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
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