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.
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 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 would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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
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
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
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
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.
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
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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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
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
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
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.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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.
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
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 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
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
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
Generational Equity, LLC’s affiliates are all part of one corporate family, they work with one another and may work together to provide services to you. The sharing of your information among affiliates enables Generational Equity to serve you more efficiently and makes it more convenient for you to do business with Generational Group. Generational Equity is permitted by law to share information with its affiliates. All of our affiliates follow similar privacy policies.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.