Should I pay for a Business Valuation?

In 9 out of 10 cases you should not pay a fee to have a knowledgeable broker provide an opinion on the Fair Market Valuation of your Company. There are a number of reputable Business Brokers who can provide an honest opinion on the current value of a privately-owned Company. Occasionally there will be a need to pay for a valuation when it is required by the IRS or a court of law, and in these instances there are generally specific guidelines as to what is acceptable.

What sort of information will I need to provide in order to obtain a Fair Market Valuation Range?

Buyers and Lenders always work from the Federal Tax Returns. However, Buyers and Lenders expect to see certain expenses added back (recasting) in order to properly demonstrate the historical cash flow of a business. Obvious examples are Depreciation and Interest. Expect to provide at least 3 years of tax returns as well as interim financial statements for the current year.

Why is a “Range” used to estimate Fair Market Value?

Different Buyers are going to perceive different value in a business. A Financial Buyer will crunch the numbers, and then depending upon their perception of the risk calculates a Return needed on their Investment (ROI). For instance, if they require a 33% return on their investment, they will apply a three (3) multiple to cash flow. A Synergistic buyer will have a lower perception of the risk. They may only require a 25% ROI on the same business and therefore apply a four (4) multiple to the cash flow.

If I use a Business Broker, will I be required to enter into an “Exclusive” listing?

Yes. No Broker worth their salt will take on all the responsibilities of getting your business sold without an exclusive agreement. It can take anywhere from 5 – 7 months (or longer) to get a business sold. However the agreement you enter into should give you an option to terminate future representation after a reasonable period of time. You do not want to tie up your business for 12 months with a Broker that is not making meaningful efforts to get your business sold.

How can I be certain that the Broker can perform?

There are no guarantees that a Broker will deliver the desired result. However, it is totally reasonable to ask for referrals of business owners that have worked with the Firm or Broker so that you can perform some due diligence before making your final decision.

I don’t want my employees or competitors to know we are selling the business. How is confidentiality preserved?

The first time your employees or vendors should hear about the sale is in the meeting with them the day after the business has closed escrow. (See Informing Employees of the Sale of Your Business for more information.) There will need to be site visits so that prospective buyers can visit the business and “see touch and feel” in order to determine if it is a fit. ASG organizes these outside normal hours when employees are not around. We also require Confidentiality Agreements to be in place BEFORE any specific information is given to a prospective Buyer.

Is there a price put on the business if we go to market?

No. If we disclose a price that will “cap” what they will pay. Often we get pleasantly surprised as to what Buyers are willing to pay for a particular business, but the key is to try and get the Buyers to come to their own conclusions.

I’ve heard there is a lot of litigation associated with the sale of a privately owned business. How can that risk be mitigated?

A thorough due diligence process is the first line of defense should problems arise after the business has been transitioned. ASG coordinates the process of providing comprehensive due diligence materials in writing to the Buyer which typically form part of the legal agreements as an Exhibit. The purchase agreement must stipulate the Buyer has not relied on any verbal representations, only the written information provided to the Buyer.

A couple of my competitors may pay the most for my business, but they could also damage my business if they find out it is for sale. How do we manage this conundrum?

The decision as to whether to consider a competitor as a potential Buyer lies with the Seller. Should the decision be made to approach a competitor, we will typically leave that to the very end of the process, hopefully with an acceptable Letter of Intent from another potential Buyer in hand. In this way we can actually go to the competitor with a “take it or leave it” price and require that they give us a decision within a couple of days. Of course this is done after they have executed a Confidentiality Agreement.

All businesses have warts and pimples…even my beautiful “baby”. How do we handle that with prospective Buyers?

ASG believes that “Honesty is the best policy”. Buyers are not stupid, and they will likely find out anyway. So we will want to disclose this sort of information in the Confidential Business Review that a potential Buyer receives after they execute a Confidentiality Agreement. If it’s a deal breaker, it’s better to find out sooner rather than later.