This is the second article in a series examining common questions from attendees at our M&A seminars. A couple of days ago, we focused on the question of timing, i.e., selling a business when it is the optimal time to do so. Today we look at a second question we get quite often, which is: What is my business really worth?
Of course when a seminar attendee asks our professionals this question, we have to say that we have no idea at that point. This frustrates many business owners who are hoping to have an idea right away of what we think the business is worth.
But until we complete a thorough evaluation of the company, we literally have no idea what the value of the business is, and any attempt to provide an answer to that question in our initial meetings would be considered “ballparking,” which professionally is a big no-no.
The first step in an engagement with any legitimate M&A advisory firm like Generational Equity is the evaluation phase. It is during this critical step that the “economic” value of your business is determined. This valuation is based purely on recast financials.
If you are not familiar with recasting, it is the accepted accounting principle that eliminates from the historical financials any items that are unrelated to the ongoing business operation. These can include superfluous, excessive, or discretionary expenses and/or non-recurring revenue and expenses.
Recasting is vital because it provides an “economic” view of the company as though it were run by management dedicated to maximizing profitability. Some common examples of these recast items would be surplus company cars, discretionary business trips that double as vacations, other write-offs such as luxury box seats at sporting events, leased boats or planes – essentially anything that has been used legally to reduce taxes. Let’s face it, you have probably been working with your tax accountant for years to do so. Recasting recaptures all of that and shows the true profitability of your company.
Once recasting is complete (and be prepared to spend several hours if not days working with both your accountant and your M&A advisor on this), it is then possible to determine the true “economic” value of your business.
I have used the term “economic” several times. I do so with a reason: The value of your company is multi-leveled. The base value, the “economic” value, is driven purely on your recast financials that are used as your starting point for a 5-year pro forma (financial forecast). It does not take into consideration any premiums over this value that specific buyers may find in your business.
And this is an important distinction to keep in mind. Your “economic” valuation is determined using a combination of methods, some of which may include (depending on your industry and other factors):
These are just a few methods. In reality, your M&A advisor should use a combination of all of these when analyzing your valuation. One method is usually determined to be the best fit for your company based on extensive analysis and testing. So that is how your “economic” value is determined. It forms the baseline when selling a business.
As you can see, the “economic” value makes no assumptions regarding who the specific buyer will be. Nor should it – it is purely based on your recast financials and valuation methodologies.
Ultimately the true value of your company will be based on this: What a willing and informed buyer will pay based on the value they place on the “intangibles" of your business. This is also known as the “market” value. And the reason this cannot be factored into your “economic” valuation is that the value of your intangibles will vary from buyer to buyer.
For example, Buyer A may find your blue chip customer base to be the intangible that really interests him. Or Buyer B might see tremendous value in your core base of very experienced employees. Other buyers may place value on your location, equipment, facilities, and brand name. As you can see, your ultimate value will be determined by what your buyer sees as valuable about your business.
And this is what makes ballparking a value at the outset of any process you begin with an M&A advisory firm so impossible. Until a thorough evaluation is done to vet the “economic” value and until a deal making team flushes out the intangibles and markets them to a wide range of buyers, there is no way to determine a company’s true value in an initial meeting. Any firm that claims they can do so should be avoided.
Since we are limited by space here to fully explore this vital topic further, I recommend if you are interested in learning more about selling a business, that you set aside time to attend one of our M&A seminars. These are no-obligation, complimentary sessions that explore in far greater detail the methods used to determine a business’ worth prior to selling a business. .
No matter what, don’t approach the valuation of your company lightly. It is a highly complex process and needs to be done accurately in order for you to truly be able to find the optimal buyer for your company.
The evaluation stage is critical when selling a business. Be sure to get it right before you start the process.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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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
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
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.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
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.
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 need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
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
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!Tom Currier, Former President & CEO, Rackmount Solutions
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 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 most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.Caroline Connelly, CEO, OptoTest
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.
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
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.
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
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
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.Shane and Johanna Kline, Owners of Vision Upfitters
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
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