Business Valuation/Pricing Tips

Value...What is it?

Value, whether it is related to a business, house, collectable, stock, or any other marketable item, is subject to a number of variables. Some of these variables are easily measured and factored into the value calculation. Other variables impacting value can be subjective, and not easily measured. The value of a business is impacted by both subjective and easily measurable factors. Subjective factors are based on the viewpoint of the different people (or stakeholders) involved. It is not uncommon for the value of a business to be interpreted differently by two people viewing the business from different lenses or perspectives.

In a similar way that houses or any other asset is appraised to define a common value based on standard appraisal concepts, businesses are valued based on a defined set of basic criteria. The standard methodology to valuing a business allows for potential buyers, lenders, and sellers to assess a business with common standards.

It is not unusual for the perspectives of a lender, seller, and buyer regarding the value of a business to be inconsistent.

The Lender's Lens

Lenders are interested in getting the money back that they have loaned to buy the business. The lender generally looks at the business through a slightly pessimistic lens (which they may call realistic). They critically assess the buyers background in terms of ability to repay the loan. Lenders apply standard ratios (such as debt coverage ratio) to evaluate the risk associated with a business loan. The value of a business is based on the defined ratios in relation to the risk tolerance of the lender.

The Buyer's Lens

Buyers are typically assessing a number of business opportunities to determine which one (if any) makes sense for them. In looking at various businesses, buyers have the unique opportunity to objectively review the different businesses using a number of metrics including 1) Gross Sales, 2) Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), 3) Owners Discretionary Income, 4) Listing Price, 5) Net Owner Benefits, and a number of other evaluation criteria. Ultimately, buyers are interested in getting the best deal possible on a business that fits their needs. Assuming a business fits all of the buyers needs in terms of profile, value to a buyer is in large part based on the return on and of the buyer's investment. It is important for a buyer to be able to clearly see how the business can generate the required financial return and allow the buyer to obtain financing if needed to buy the business.

The Seller's Lens

Sellers have worked hard to build the business that they are now planning to sell. In many cases the sellers business represents a lifetime of sweat, and perseverance. The seller usually has a great deal of pride in the business they have built, and generally know how the business has operated over time. As a result, sellers are usually very confident in the ability of the business to generate cash flow based on the historical financial statements.

It is often hard for a seller to see a potential buyer or lender objectively questioning the performance of the business. Sellers tend to see value in their business with very little adjustment made for risk or unknown factors. In fact, this may be the most accurate lens of value. However, in order to sell the business, a seller, buyer and lender need to see similar value.

ABMI helps to bring the lens of each stakeholder into a common, and mutually beneficial focus. In fact, ABMI, having brokered the sale of thousands of different businesses over the last almost 30 years, has a keen understanding of the focus/priorities/needs of the buyer, seller and lenders, and we have been very successful in organizing transactions that satisfy all parties.

Financial Statement Review

Financial statements and accounting practices of a business are typically designed to minimize the owner's taxable income, and not to show the maximum cash flow the business generates. So, "cold" financial records that haven't been analyzed professionally seldom are useful for determining the value/price of a business. The financial performance of a business is assessed using the net financial benefit to the owner as opposed to simply determining the taxable income from the Profit & Loss statements.

You may have heard of the process of adjusting the financial statements referred to as Earnings Reconstruction (ERCON), or Recasting. The reconstructed net benefit is referred to as the Stabilized Net Owner Benefits (NOB) or Owner's Discretionary Income. Other adjustments are usually also required to normalize/stabilize the financial statements to reflect the true picture. These additional adjustments typically include 1) backing out depreciation and amortization expenses, 2) backing out interest expenses for the seller's existing loans (these loans are not transferred to the buyer with the business), 3) pulling out owner's compensation and an expense, and replacing it with a fair market compensation for a replacement manager, and 4) adjusting for other owner perks that are considered discretionary (elective) expenses.

Review of the financial statements can be confusing, and the ABMI consultants can help make the process seem effortless. In fact, the financial records of every business listing that is evaluated by ABMI is conservatively analyzed/recast/stabilized by ABMI, as an accomodation, to help ABMI and the business owner clearly see the discretionary cash flow that could be available to a potential buyer.

When Should A Business Owner Have An Evaluation/Pricing?

Even if a business owner doesn't choose to sell the business at the present time, the evaluation is still a valuable informational asset. Even if the owner might be months or years away from considering selling the business, the ABMI evaluation/pricing service has proven to be useful, by offering the owner tips which, if implemented now, can help stage the business for sale later, and often times the evaluation can help the owner realize more for the business than would be possible without the ABMI evaluation. And, we hope that you will use ABMI's marketing services when the time comes that you do with to sell the business in the future. In fact, ABMI recommends that business owners contact ABMI annually for a free evaluation/review, so that the business owner stays regularly informed about market potentials.

Other factors that can affect business value

Many other factors should be considered in the assessment of the value of a business. Other factors can include:

Value Analysis

There are a number of methods to apply the defined factors to calculate the value of a business. These methods include the 1) Capitalization Method, 2) Debt Coverage Ratio (DCR) method, and 3) Risk/Price Multiple (RPM) method. Your ABMI consultant understands the calculation of value using each of the various methods and will help you see the calculated value applying various methods.

Evaluations/Pricings Peformed by ABMI for Business Owners

ABMI performs many services, including providing the business owner with a free evaluation/pricing to help determine the market price for the business. This pricing/evaluation service helps the business owner understand the "realities of the marketplace" and is based on understanding what buyers are likely to pay for a particular business, and what lenders are likely to lend.

With proven expertise in the valuation, pricing and marketing of privately owned and closely held companies, ABMI serves each client competently and confidentially. ABMI assists business owners/sellers in all phases of the transaction, linking analysis, planning, valuation, pricing, marketing, qualification of prospective purchasers, negotiation, due diligence and ongoing interaction until the transaction is successfully completed. When selling a company through the services of ABMI, business owners benefit from a refined and proven professional process.

One very important reason a business owner should consider having an evaluation/pricing performed by ABMI is that many sellers under-appreciate the value of their business. Some are the victims of poor/incorrect advice. Some business owners aren't familiar with all of the value ingredients that buyers and lenders are willing to credit the business with when determining what a qualified buyer might pay for a business. An ABMI evaluation/pricing is based upon almost 30 years experience by ABMI in successfully evaluating/listing/selling thousands of different businesses, totaling hundreds of millions of dollars of transactions, of all sizes, all types, all prices.

Evaluations Performed By ABMI For Business Buyers

Some buyers contact ABMI for an opinion of the merits of an acquisition the buyer is considering, prior to the buyer going "beyond the point of no return". These are usually acquisitions that the buyer discovered apart from ABMI's efforts (such as acquisitions the buyer may be considering that were found using some other business brokerage). ABMI offers this service to buyers, so buyers can confirm "the realities of the marketplace", and so buyers can confirm that the acquisition they're considering is, in fact, priced within generally accepted rules of thumb pricing and terms. This service is offered to buyers at no extra charge to the buyer.

Evaluations Performed By ABMI For Buyers, Prior To The Buyer's Identifying The Buyer's "Ideal Deal"

Many prospective business buyers contact ABMI for advice, prior to the buyer choosing a business, and prior to a buyer deciding what business might be "just right" for him/her to acquire. ABMI offers this "pre-selection" service to help buyers understand the various elements included in a business acquisition, including financing options, SBA details, information on how to choose a business to buy, how to find a business once the buyer identifies the "type" or size of business, options available to the buyer in the terms sellers might offer the buyer, how to conduct thorough and low risk due diligence in acquiring a business, etc. This service is offered to buyers by appointment, at no extra charge to the buyer.

Fee Based Consultations/Evaluations

ABMI charges no front fees to sellers on most small and medium size business representations. But, we also accept special consulting engagements by business owners whereby ABMI receives a retainer for it's services, against a commission when the business sells. There is never a fee for the initial consultation, and the fee based engagements are only with the seller's or buyer's approval. However, most engagements with small and medium size businesses are on a commission only basis.

ABMI's Middle Market, Mergers & Acquisitiongs Division also acccepts special fee based engagements from sellers and buyers of larger business enterprises.

Confidentiality

We are keenly aware of the importance of the maintenance of high standards of confidentiality in business representations, and have developed a unique Promise Of Confidentiality System, which gives all parties a satisfactory comfort level.

Entrepreneurs (business buyers and sellers) who are considering a business acquisition should register with this ABMI web site to arrange to receive information which can help you investigate how you might buy or sell a business with minimum risk and maximum benefit to you.

ABMI will then provide you with information and a free, no cost, no obligation consultation, including a professional eveluation of your project.

6201 College Blvd., Ste 385
Overland Park, KS 66211
Phone: 913-341-6300
Fax: 913-381-5978
info@abmi.net