How Does Your Company Rate?
Valuation of private companies is much more subjective than public companies because there is no free trading marketplace for the private companies’ stock. Just like a champion Olympic figure skater, the performance has to be flawless. Take a look at the following check list – see if the target company rates near perfect (on a scale of 1 to 10 – 10 being best):
• Stable Market
• Stability of Earnings Historically
• Realized Cost Savings After Purchase
• No Significant Capital Expenditures Herewith
• No Significant Competitive Threats
• No Significant Alternative Technologies
• Large Market Potential
• Reasonable Market Position
• Broad-based Distribution Channels
• Synergy Between Buyer and Seller
• Sound Management Willing To Remain
• Product Diversity
• Wide Customer Base
• Non-dependency on Few Supplier
Mistakes Sellers Make
• They neglect to run their business during the sales process. – The owner of a business with sales under the $20 million range can get so involved in the selling process that they neglect the day-to-day operation of the business.
• They don’t understand the “real” value of their business. – A business may actually command a higher price than the value determined by an appraiser. The business may be worth more than the sum of its parts. A professional intermediary, along with other advisors, can answer the question of real value and help determine a “go-to-market” price.
• They aren’t flexible in structuring the transaction. – In many cases, how the deal is structured is more important than the price or terms.
• They are not looking at the business from a buyer’s perspective. – Buyers may look for different aspects of a business than those the seller looks for. For example: growth potential, management depth, customer base, etc.
• They start with too high a price. – Sellers obviously want to maximize the price they receive for their business, but today’s marketplace is difficult to fool. A good buyer may just elect to pass because of an overly aggressive starting point.
• They are impatient. – Sellers have to understand that it can take 6 to 18 months to find a buyer and proceed through the sales process, which includes due diligence, the legal and accounting issues that must be handled, and ultimately the closing. However, on the flip side, the longer the deal drags, the more likely it is to fall apart. As the saying goes: Time is of the essence!
• They have insufficient or inadequate documentation. – Sellers should have current real estate and equipment appraisals at the ready along with any documentation a buyer might want, such as projections, business forecasts and plans, and environmental studies. Having all the documentation and financial records readily available will not only speed things along, but might also provide for a higher price or, even more important, save the deal.
Expediting Change Post-Closing
The deal is done and you have completed the closing. Now what do you do? You help the new owner because chances are that you have some vested interest in the new entity, and it is in your best interest that the new owner is successful.
For example:
– there may be an escrow account due you.
– the buyer may have given you a note.
– you may be the landlord, and the buyer the tenant.
– your name remains on the company letterhead, and your personal reputation continues to be associated with the business.
– your former employees depend on you to have made the right decision in selling to the particular buyer, thus preserving their jobs.
Surveying the Business Scene: How Many Sell?
One of the most frequently-asked questions by those looking at the independent business scene is: “How many are for sale?” Right on the heels of that question comes another: “How many actually sell?”
To determine how many of these businesses are for sale at any one time, and what percentage of these get sold, it is necessary first to define terms by business category. The industry groups that account for the majority of small to mid-sized business sales are: manufacturing, wholesale trade, retail trade, business and personal services, and household/miscellaneous services. Using these categories as components, the total number of businesses that apply to our “survey” is approximately 6.3 million.
Of this total, businesses that are for sale at any one time account for roughly 20 percent. There is naturally going to be a higher percentage of businesses for sale that employ four or less workers, but some independent business experts feel that fewer of these businesses–at least percentage-wise–sell than do the larger ones. Of those businesses with four or less employees, one expert’s estimate is that one out of six actually sells; with five to nine employees, about one out of five sells; and the trend continues.
Why is the actual-sale percentage lower for very small businesses? Many factors operate to affect this tendency. For example, the much smaller business may suffer more from unsubstantiated income or inaccurate financial information. Some owners may not be realistic in their pricing or simply aren’t serious about selling (problems that can threaten the sale of a business at any level). Still others may simply pay the bills and close the doors.
However, no matter what the percentages show, a business owner considering putting a company on the market should remember this: most businesses are salable if the seller is realistic in assessing value and is aware that the marketplace is the final arbiter of the selling price.
Rating Buyer Seriousness
Use the following criteria to separate the serious buyers from window-shoppers. (Add up plus points, subtract minus points. The serious buyer will rate a 6 or above.)
Minus Point Factors
- -4 needs outside financing (excluding home equity)
- -4 been looking for 6 months or more
- -3 no available cash
- -3 still working in corporate world
- -2 spouse not supportive of buying a business
- -2 uses a legal pad or clipboard and takes too many notes
- -2 feels leisurely about finding the “just-right” business
- -1 now renting (although has lived in area for some time)
- -1 under 25 or over 62
Plus Point Factors
- +3 does not have a job or has just resigned
- +3 understands that books and records are not the only indicators of value
- +2 has enough money to buy a business
- +2 no dependents
- +2 family member or close relative has been a business owner
- +2 willing to take the time to look without a lot of notice
- +1 location is not a prime consideration
- +1 age 25 to 62
- +1 skilled worker or professional