Spring/Summer 2015 | BWD 15
Valuation methods
There are many valuation methods available, depending on the
situation. If several comparable transactions (“comps”) exist, they can
guide a valuation. If there aren’t many comps available, future revenue
and profitability can be projected to determine a value based on
discounted future cash flows.
Identifying risks
One issue owners sometimes face is thinking their business is
worth more than it actually is. This can stem from a personal bias
— they understand all of the hard work and dedication that went
into the business, which can inflate its value in their mind — but it
can also be indicative of a failure to clearly identify post-sale risks.
Owners can overlook these risks because they’re busy running the
business, whereas the risks are clear to potential buyers:
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Will customer relationships exist after the sale?
Is intellectual property protected?
Are competitors more viable than previously thought?
Is the business built for the long-term, or will value exit with
the owner?
This evaluation can reveal that owners have well-paying jobs rather
than salable businesses. However, with enough lead time, the
groundwork for a successful sale can be laid.
Internal considerations
A business’s operations affect its valuation, as buyers examine
operational and financial strategies. For instance, does the
business maximize profits or aim to minimize taxable income?
(A company engaging in a tax minimization strategy would list
expenses such as charitable donations and company vehicles as
discretionary expenses. A company maximizing profit would not
list them as such.) Business strategy affects financial information,
and perhaps buyers’ offers as well.
Another key element is owner involvement. Contrary to what
many entrepreneurs want to hear, sometimes passive owners are
more objective and realistic about the business’s value, risks and
the strategic implications involved. Buyers can factor ownership
roles into their offers.
Importantly, owners must realize the sale price isn’t what they’ll
personally net. Many factors determine what owners receive, including
taxes, the business’s ownership structure, shareholder distributions
and more.
Every industry has its own buyer pool, ideal valuation method and
rules of thumb. That’s why it’s vital to use advisors with the foresight
and expertise to help owners find the most relevant approach, tailor it
to their business and give them confidence.
Sale preparation
Selling a business isn’t easy, which is why it’s important to understand
these steps and to pull together an experienced transition team
comprised of professionals in the legal, accounting and valuation
fields, as different experts are needed throughout the process.
The time and effort are worth it, though, once the seller realizes the
fruits of his or her labor while also delivering value to the next owners.
Timing
Preparing to sell a business can take a long time — sometimes as
long as five years or more. That’s because several steps are required,
including:
1
Making internal reforms
2
Identifying potential buyers
3
Marketing
4
Negotiating
5
Crafting a purchase agreement
6
Closing the sale
As the adage goes, “Failing to plan is planning to fail.” Despite what
can seem like an arduous process, the time required to plan the sale is
time well spent.
Preceding the sale, a thorough evaluation of financial operations
and owners’ roles is prudent. Making appropriate changes well
before a sale can significantly add to the valuation.
ABOUT THE AUTHORS
Greg Light is a Principal at Rehmann. He has significant experience in the valuation of
ownership interests of closely-held businesses for a wide variety of purposes, from financial
statement reporting to ownership transition. Contact him today at [email protected].
Mike Mayette is a Principal at Rehmann. He has successfully represented taxpayers before
the Internal Revenue Service for numerous corporate and personal income tax, estate tax,
and gift tax issues. Contact him today at [email protected].
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