Understanding Buyer Types

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Understanding Buyer TypesWhen business owners put up their companies for sale, there’s not really any way to guess what type of buyer may end up acquiring it. But to be better prepared to negotiate and communicate during the sale process, sellers should be familiar with four typical buyer types, who vary in goals, spending power, and needs.

Individual Buyers

Individual buyers are often people looking to be owner/operators. They may be seasoned business owners, but may also be long-time employees who’ve finally decided to take the plunge into entrepreneurship. They represent the type of buyer we most often see here at Apex.

Individual buyers will often:

Sellers should find out: 

  • what is the motivation of this type of buyer?
  • what are their financial means?
  • do these buyers have the support of friends and family?

Strategic Buyers

Strategic buyers are usually companies (not individuals) looking to expand their operations by acquiring an existing business.

Strategic buyers are:

  • not at their first rodeo — if they are in acquisition mode it’s because they already know how to run a well-oiled company
  • worthy negotiators — because this isn’t their first rodeo, you’ll need strategies for how to encounter deal points
  • likely to be in your industry or near it — sometimes they can be a vendor or customer

Sellers should find out: where does this acquisition fit in with the greater plan?

Additional things to consider:

  • Your brand may disappear
  • Your employees may be let go
  • Financing will usually not be a problem
  • Some form of Seller financing or earnout is still likely

Financial Buyers

Like strategic buyers, financial buyers are also companies, but they are less interested in expanding into local markets and more interested in digging into your numbers to look at your ROI.

Financial buyers are often:

  • Private equity groups
  • Hedge funds
  • High net worth individuals
  • Not excited about risk

Sellers should find out: what sort of returns are these buyers looking for in the short, medium, and long term?

Sellers should also expect forensic due diligence from this type of buyer. Like strategic buyers, they may look to “trim fat” by making changes to your business right away. 

Family Offices

Family offices could be either strategic or financial buyers, depending on what their philosophy is. But all family offices are generally on the lookout for highly profitable ventures offering attractive long-term returns.

Employees

It doesn’t happen often, but we have helped employees buy companies. They offer a unique opportunity.

Employees:

  • Know the business better than any outsider could
  • Are incentivized to grow the business 
  • Are preserving continuity for themselves while taking on a risk they feel comfortable with

Employees are likely to have a profile that overlaps with individual buyers. If financially qualified, banks love this type of buyer.

Sellers should find out: would an ESOP help develop this type of option or be a hindrance in a sale to the other types of buyers?

Final Thoughts

By being familiar with the types of buyers, you can have discussions with your broker about what is likely to be the best type of buyer for your business and then market your business accordingly. While it’s important to have a wide buyer pool, being prepared for specific types of buyers will pay dividends during the go to market phase.

Not sure which type of buyer is best for your business? Give us a call and we’ll share our expertise.

5 Items that Belong On Your Business Sale Closing Checklist

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5 Items that Belong On Your Business Sale Closing ChecklistEvery business is going to have its own particular set of documents that it’s going to need at closing. But there are a few that need to be on everyone’s checklist and a couple that often get forgotten or don’t get due consideration. In this article we’ll share those items and what you should know about them.

But before we get to them, you have to realize that a closing date is an expression of intent. It’s not a guarantee. There are things that both buyer and seller can do to move that date around. Whether you’re a buyer or a seller, you don’t want your actions to be the reason a transaction is held up. Make sure these items are handled so that closing can happen as scheduled.

Work in Progress (WIP)

The reality is that sellers are going to be delivering goods and services to your customers right up until and beyond the moment of the transaction. Both buyers and sellers will want there to be as little interruption as possible to normal business operations. This means creating a document of work in progress and figuring out how that WIP is incorporated into the sale price.

For example, if you have taken in work that the seller has already received payment for, but the employees or contractors will not complete (or get paid for) until after the sale, you have to work out who is going to pay. Will the seller make separate payments to those employees and contractors for that WIP, or will it be deducted from the sale price, leaving the new owner to take care of it? That’s one way of looking at it, and there’s no “correct” answer, but it’s not something you want to leave to the last moment.

Building Lease

We can’t tell you how often business transactions have been held up (or blown up) because of failure to deal with a lease issue. If you have a lease, you need to make sure long before closing that a new lease can be contracted with the buyer or that the seller can pass on the lease. 

This is an example of an item that is out of both the buyer and the seller’s control, so the more time that is allowed to deal with this, the better.

New Entity

The buyer is often going to need to create a new business entity and once he/she has that EIN, will need it to open business bank accounts and credit card merchant accounts. That shiny new bank account will also be a good place for the buyer to drop in some working capital.

We’ve also mentioned the need for buyers to make sure they have the proper licensing with the appropriate authorities in order to have a seamless transition. Often a new entity will be needed to obtain those licenses.

Employee Meeting

You need to keep lips zipped when it comes to a business transaction (if you don’t believe us we shared some recent stories on our podcast). Ideally most (if not all) of your employees should find out about the transaction on the day it closes.

How the meeting goes and what is covered is something for buyer and seller to work out, but the three feelings your employees should have coming out of the meeting are:

  • Security: they aren’t getting fired.
  • Positivity: this is a good thing.
  • Optimistic: there are some exciting possibilities ahead.

Find ways to give your employees these feelings at the meeting, and you’ll have succeeded.

Closing Meeting

This might seem like the most obvious item, but there’s a logic to when this meeting occurs as well. Things to consider:

  • Make the closing for the morning so that the parties can go to banks or government offices afterwards.
  • Scheduling the closing at the end of a quarter, month, or pay period to simplify calculations. Bottom line – close when all parties are able to do so. Any day will work. 

We’re here to make your closings simple. Give us a call to see how we can help you with your next business transaction.

Build Your Business Sale Dream Team Now

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Business Sale Dream TeamNo matter how many years you’ve been in business, you only sell that business once. That’s why a sale deserves at least some of the care and planning you put into building that business all these years. And yet, we still (more often than we’d like) get the call with the equivalent of, “I’d like to list my business on Friday and sell it on Monday…maybe Tuesday at the latest.” 

If we could go back at least six months (ideally twelve months or more) with that caller, we’d talk to them about putting together their Dream Team for this sale. 

Broker

Business brokers think of ourselves as team captains. This isn’t our first rodeo and we know how to bring the best out of all these players who may never have met each other before. We’ve got a playbook that works and when we don’t personally know the answer to a problem or challenge we have resources to the tune of hundreds of years of experience (and hundreds and hundreds of transactions) in our office.

Financial Advisor

Particularly for those business owners who are looking to retire after this business sale, numbers really matter. Questions like “how much do I need?” and “what is the business worth?” have to be asked and answered.

A solid financial advisor will not allow you to come up with an impossibly high “what do I need” number which includes every possible contingency for life. He/she will also not take your word for what the business is worth. These advisors will get a valuation for the business and/or ask you to explain your reasoning for the business value. Having what the business is worth line up with what you need on retirement is the most important math equation to solve before the sale. And it’s not something you can just wish into existence. We also can’t tell you the number of times we’ve heard, “Well the business has to be worth that much because that’s what I need to retire.”

Wrong answer.

CPA 

As the financial advisor asks the larger questions, your company CPA can answer the question every buyer will have: are the books clean?

If they are not, they need to get clean some time before the sale. We aren’t talking about weeks or months. We are talking about years. Unreliable books for 2-3 years and one good year isn’t just a bad recipe for getting bank financing, it’s also unlikely to hook interested buyers.

While the best CPAs will have warned you for years against too many addbacks, ones fit for your dream team will get your books clean as soon as possible and put systems in place to ensure they stay that way for the future owner.

Tax Advisor

So you’re going to have a liquidity event when you sell that is going to create tax problems to solve. You need someone experienced in these issues to help you structure a deal that makes sense for your plans (this means talking to your financial advisor, too) but also doesn’t give more to the government than you are legally or morally obligated to.

A dream team tax advisor will have helped more than one business owner structure a deal before, perhaps even helping to create a deferred sales trust when that made sense.

Deal Attorney

While you may have been working with a number of great attorneys over the years, when it comes to your transaction, you should look at experience over a relationship. This transaction isn’t about friendship, it’s about business, so find someone with experience to help you get the most out of it.

We’ve said before that inexperienced attorneys can exceed their remit in business transactions so if you’re short on recommendations in your network, we’ve got a number that have consistently shown themselves as dream team players in transactions with us.

Looking to build your dream team? Don’t wait until you’re ready to sell. Start building it when you’ve built something saleable and know that you’d like to sell it one day. The best prepared get the best results.

And remember, you’re only going to sell this business once. So make it count.

Continuity vs. Change in Business Sales

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Continuity vs. Change in Business SalesIn our social-media conscious age, we might think it’s a perfectly normal thing to announce a new business acquisition to the world. Imagine the humble-braggy LinkedIn post, “I’m honored to announce…” along with press releases and maybe even a shiny new “under new management” sign to drape across the exterior of the business. The problem? These aren’t always the smartest moves. Balancing continuity with change is one of the biggest challenges that any new business owner will face.

Sometimes Change is Good

We shared a success story some time ago of an owner that made pretty dramatic changes right off the bat which led to major financial gains. Short version: the old owner didn’t always send complete orders, but customers put up with it because they liked the owner and there weren’t a lot of alternatives. 

All the new owner did was actually start fulfilling the orders as requested. No more partial fulfillment. Customers were delighted and unsurprisingly, new business followed. 

Other Times, It’s Not

As we recently shared in a podcast episode, one new owner made a change and was bankrupt before the year was out. As in the previous example, the old owner could have improved a part of the business before the sale. In this case, his products and services were underpriced for the market.

The new owner, dreaming of dollar signs, immediately implemented a dramatic price change when he took over the business. The customers were unhappy and it was only 60 days later that the new owner had driven the old business into the ground.

Were the prices outdated? Definitely. They hadn’t been changed in over a decade.

Could they have been changed gradually, with explanations and context? Of course.

Did the customers save any money by switching? Probably not, but they got to vote with their feet, which is one of the most powerful muscles that consumers like to flex.

But the new owner thought revenue was just a matter of flipping a switch. Unfortunately for him, it was the off switch.

We Resist Change

We may not like to admit it, but we are creatures of habit. That’s why you see companies spend untold millions getting you to simply try a new beverage or toothpaste or even a type of “burger” made with beets. They know that at least trying something is a gateway to possibly making that product a willful future purchase.

The same is true with businesses we deal with. We develop relationships with them and just like employees, we fear that the new owners might mess everything up. We might stay away from the business for a while “waiting to see what happens” but that in itself can create a self-fulfilling prophecy in which fewer people go and the business hits a revenue death spiral, simply because of the perception of change.

Change, But Slowly

This is not an impossible problem. In fact, we’ve seen it successfully negotiated hundreds of times.

Firstly, don’t change anything. The reason you bought a business in the first place is because it works. If it ain’t broke, don’t fix it.

Obviously changes that are not customer-facing can be done right away, whether that’s a change of who the company banks with, or processes credit cards with, or solicits for insurance coverage.

But other things, like what we mentioned regarding pricing, or personnel who are customer-facing and have developed relationships with the customer base, should be left as is.

If there are changes you’re considering, poll employees and customers. Give them a voice.

If there are changes you are definitely implementing, think about how to give context and explanations to customers. They deserve it. They don’t owe you anything, especially as a new owner. Take the time to explain why prices need to change, or the logo is adding a new color, or why you’re adding a new product or service (or getting rid of old ones). People won’t always be happy with the changes, but they’ll appreciate the explanation.

And you’re much more likely to keep them as customers. And keep the business too, instead of losing it in 60 days.

Want more tips on how not to lose a business in 60 days? Give us a call!

Do’s and Don’ts of a First Buyer/Seller Meeting

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Dos and Donts of a First Buyer/Seller MeetingAll transactions start with a first buyer/seller meeting. There are lots of ways to get this meeting right, and a few ways to get it really wrong. In this article we’ll share some do’s and don’ts you need to have on hand for a successful buyer/seller meeting.

Do’s

Meet in Person

While the pandemic normalized video meetings for buyers and sellers not geographically convenient to each other, meeting in person is always the best case scenario. You get all the advantages of real-life meetings, including enhanced body language reads.

But if you can’t meet in person, definitely opt for a video meeting. It’s a new normal that we’ve seen enhance the business transaction process significantly.

Build a Relationship

If the end goal is a transaction, realize that this is where everything starts, so take it seriously.

Be yourself and truly get to know the other person via the frame of their business. Before they decided to put the business on the market, what were some of the high points they experienced in growing the business? Ask about the lows too.

Some Basic Diligence

The worst thing we as brokers can experience is an unprepared buyer. They don’t just make themselves look bad, they make us look bad as well, as the seller might understandably assume we didn’t prepare our client for the meeting. 

This is not the meeting to be asking questions about add backs or negotiating on price point (it is a first meeting, after all…slow down!). Just as an employer doesn’t like it when a candidate for a job has zero questions during an interview, a seller might understandably be skeptical if a buyer doesn’t come with at least one or two questions to this meeting.

Don’ts

Get Overly Detailed

This is not life-story time. It’s enough to find out what a day in the life is for the seller as well as what mistakes they feel they’ve made and what opportunities they have not yet taken on but could be attractive to a seller. 

On the other hand, don’t let sellers get away with short, closed answers. They should be willing to give context, not just answer “Yes,” or “No.”

Think You’re Special

American consumer culture teaches us that “the customer is always right.” The healthiness of that attitude is a topic for another day, but we can certainly say it does not apply in business transactions. The seller is interviewing the buyer just as much as the buyer may be interviewing the seller. Stay humble and try not to lead by bragging.

This isn’t a job interview or a home purchase (it’s actually a little bit of both) so don’t fall into old habits of meetings but think about this as a different sort of meeting than you might be used to.

Final Thoughts

Buyers should remember that this is a 60-90 minute meeting, tops. It’s a high-level meeting to establish a relationship and ask some key questions.

That begs the question…can you make an offer at this meeting?

Absolutely. We see people ask for an Offer to Purchase form and sometimes end the meeting by signing one and giving it to the seller.

However, that’s not the expectation for most transactions. As we noted above, this is a first meeting and it’s understandable that both parties may want to take some time to reflect before progressing further. 

Want to make sure your first buyer/seller meeting goes well? Ask one of our team to prepare you! Give us a call today.

Key Elements of an Offer

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Key Elements of an OfferWe’ve talked about our signature Offer to Purchase (OTP) before. In this article we’re going to break down that OTP into some broad areas to make sure buyers know what can make an offer attractive to sellers.

Don’t Wait on Diligence

Sometimes buyers will ask to do due diligence before making an offer. But a business is like anything for sale, and those who submit offers sooner are more likely to get accepted than the offer that may come from someone “after they’ve seen additional details.”

Show Me the Money

Earnest money or escrow is typically required of a buyer when making an offer. A seller wants to know that a buyer is serious and committed before allowing additional confidential information to be shared. Often the escrow money that accompanies an offer is the first of three payments that together can comprise a down payment:

  • Escrow payment 1 accompanies an offer
  • Escrow payment 2 is due with the acceptance of an offer
  • Escrow payment 3 is delivered a week prior to closing

These three payments will usually comprise at least 10% of the total amount of the sale, but can sometimes be more.

The amount of the earnest money can also signal to a seller how serious an offer is. This doesn’t by itself make the offer better, but it’s definitely something that sellers consider when looking at competing offers.

Time Constraints 

The offer should also mention milestones. Examples include:

  • A certain amount of time for diligence. 3 weeks is the most common.
  • A target closing date. This will depend on the particularities of the buyer and seller and can be tied to personal or business matters. The bank lending process is also a key factor in setting a closing date.
  • Transition. Sometimes sellers are getting out lock, stock, and barrel, and will have a short transition time. Other times sellers will continue to work in the business uninterrupted for months, sometimes even years at a time. A desired transition time should be spelled out in the offer.

Obviously all these times are negotiable, as they are part of an offer, and when the seller accepts, he/she may accept with changes made to these timelines.

Reminder to Sellers

While it’s exciting to accept an offer, it’s important to remember that it’s only the beginning of the process. We often tell sellers to keep working in their business as if the sale was not going to happen. 

That means: 

  • keeping the sale confidential
  • continuing to run the business as usual, whether that’s hiring new team members or running the usual advertising campaigns, etc.
  • setting aside a block of time to dedicate to the sale each week so that the process keeps moving forward; selling a business is a part-time job on top of running your business — thankfully it’s just a temporary one

We help draft offer letters just about every week of the year as part of the service we offer to our clients. Learn more about how we can help you by giving us a call.

First Steps in Listing Your Business

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First Steps in Listing Your BusinessWe’ve talked in the past about broad reasons why we might (and might not) take your listing, so today we’re going to get a bit more granular and talk about what that process of listing looks like.

I Want to Sell!

We get it! You’re ready to move on with your life and once you’ve told us you want to sell, you might already have a mental countdown clock started. But you shouldn’t start that clock, because we haven’t listed the business yet, and when we do, it’s going to take an average of 6-9 months to sell. So, we appreciate the enthusiasm but we need a few things first!

Key Information

We can’t price and promote your business without hard data. Most times that hard data is going to come from the last three years of tax returns along with the financial statements to substantiate and corroborate those returns. 

We’re going to need a bit of time with you and your accountant to understand some charges, as we haven’t worked side-by-side with you in the business for years and may not understand why certain things are classified the way they are.

Not Auditors

We aren’t the IRS and we aren’t interested in passing judgment or scolding you for where expenses have been classified. What matters to us is getting to a clear number of SDE that will allow us to move towards a proper price for your business. That said, we’ve seen some, shall we say, creative interpretations, including:

  • Vet visits for a dog classified as “security” expenses
  • Cosmetic surgery for a spouse classified as “building improvements”
  • A lake house used once in five years for a company retreat as an active company asset

Banks can be leery of excessive addbacks, but that doesn’t mean they won’t work with companies that have a lot of them. But without being clear as to what expenses are legitimate addbacks, we can’t get a true value for your business.

Seller Disclosure Statement

So we’ve gotten all the key paperwork we need to get pricing, now we need to cover anything the numbers can’t tell us, which can include:

  • Current or future lawsuits/legal actions against the business
  • lease/real estate situation (if applicable)
  • Upcoming changes (key employee or major customer leaving)

This information completes the snapshot we will come up with called the Confidential Business Review (CBR).

Why Confidentiality Matters

Confidentiality is perhaps an important part of a business sale in general, but it’s particularly important during the listing process. Don’t tell employees what is in the works or you may have an exodus that leaves you with a shell of a business.

Going to Market

Armed with all this information, we will put together marketing material to showcase your business in various formats and on various platforms, and to do so confidentially. We asked you to keep things confidential, and we follow our own advice. We even keep that confidentiality sometimes long after a sale closes, referring in general terms to a business in a generic industry in a generic region.

That countdown clock we referred to above? Now that the business is listed, you’re free to start it, but make sure you do with expectations that have been tempered by a discussion with us, not a timeframe you’ve manufactured in your head. You may have sold a business before, but you’ve never sold this business, in this market, before. 

Did this article make you realize you need to get a few ducks in a row before you can even list your business? We’d love to help you with those ducks! Give us a call.

Passing On a MBE or WBE Certification in a Sale

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Passing On a MBE or WBE Certification in a SaleA minority-owned business enterprise (MBE) or woman-owned business enterprise (WBE) is a powerful certification to have in certain industries. They can connect you with larger corporations and government agencies (at the federal, state, and local level) that set spending goals and targets for businesses owned by minorities and/or women. But what happens when it’s time for those businesses to sell?

Qualifications

Before we talk about exits, let’s review what it might take to get one of these certifications in the first place.

MBE

These are for-profit businesses, regardless of size, physically located in the US or one of its territories, that are owned, operated, and controlled by minority group members. Those members are US citizens who are:

  • African-American
  • Hispanic-American (includes Puerto Rico, Mexico, Cuba, Central and South America)
  • Native American (includes those who are Eskimo, Aleut, native Hawaiian)
  • Asian-Pacific American (includes Japan, China, the Philippines, Vietnam, Korea, Laos, Cambodia, Taiwan, the Indian subcontinent, Samoa, Guam, and other US trust territories of the Pacific)

Ownership is defined as at least 51% owned by such individuals. In the case of a publicly-traded company, that means 51% of the stock must be owned by one or more such individuals. 

WBE

Like MBEs, these are for-profit businesses physically located in the US or one of its territories, that are owned, operated, and controlled by women who are US citizens or Legal Resident Aliens. The same ownership, operation, and control rules are in place.

Other Certifications

There are a couple more business designations worth knowing:

  • DBE (Disadvantaged Business Enterprise): aimed at those that have disabilities or residents of economically depressed areas
  • VOSB (Veteran-Owned Small Business): at least 51% owned by one or more veterans

Exit Strategies

There are two clear strategies for exiting a business with one or more of these certifications.

Continuity

If the majority of the business of the firm comes through contracts that are tied to these certifications, you will probably want to find buyers that can retain this certification. That means if you have a WBE, you’re going to have to sell to women only, or find a buying group that will make sure that magical 51% threshold is occupied by women.  Same for an MBE.

Break

You’ve heard us talk before about the importance of having as wide of a buyer pool as possible. More buyers means more interest means more offers means more leverage. But this path is only worth pursuing if you’re willing to take a valuation haircut. 

You can prepare two financial projections leading to two different sale prices, a higher one that a buyer that can qualify for one of the certifications would pay (because he/she would hold on to the business/contracts that are tied to that certification), and a lower one that assumes the certification will be lost and the business will have to continue on without it.

We would go for “continuity” if more than 20% of the business is tied to a certification and for “break” if 20% or less of the business is tied to a certification. The “break” option is nice in that it still offers continuity should such a buyer show up.

Do you have a MBE or WBE or other certification and have been procrastinating on an exit because you don’t know what to do? We can help (because we’ve helped in these cases in the past). Give us a call.

The Climate for Business Sales in 2022

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The Climate for Business Sales in 2022One way to know how the market is looking in 2022 is to look at the most recent data and recently BizBuySell released their Q1 2022 Report which offers a number of insights worth considering for those looking to close a business transaction this year.

Q4 Beats Pre-Pandemic Levels

Based on BizBuySell’s last report, we already knew that Q4 2019 was eclipsed by Q4 2021, which saw a significant uptick in transactions which was welcome news for everyone. While there were a number of factors for this, not least of it being Q4, which always offers a natural calendar-based urgency, there also seemed to be optimism in an economy that continues to recover amidst uncertainty and inflation. That has carried forward into 2022 with acquisitions now 24% higher than the same period last year and just 3.7% shy of Q1 2019, when most of us had no practical idea of the meaning of “lockdown” or “pandemic.”

Business Owners’ Numbers

Another really fascinating statistic from the BizBuySell’s previous report (Q4 2021) was the fact that despite more than half of the surveyed business owners being negatively impacted by the pandemic, the key financials of business that sold in Q1 2021 were the highest since BizBuySell began collecting data in 2007. The median revenue of these businesses was $688,020 with a median cash flow of $147,752. As other businesses regained health and also went to market, these numbers only changed slightly, finishing at $656,599 and $150,000 in Q4.

Service Businesses Remain Desirable

Some 35% of buyers in the market say they are looking for a service business. This reflects a larger trend over the past five years, in which the number of service businesses changing hands in the market has grown to 45% of all reported business transactions. By comparison that statistic was 37% in Q1 2017.

The New Pandemic(s)

Most business owners surveyed were less worried about diseases and more about the labor shortage and Great Resignation. 64% of surveyed business owners say that they have been impacted by labor shortages, and of those, 59% say the situation is either not improving or getting worse. Peers in our industry weighed in to correlate, with 59% of business brokers saying that labor shortage is the biggest threat to small businesses at the moment.

Not far behind the labor shortage which itself leads to higher overhead, there’s also the challenge of inflation due to monetary policy and supply chain issues. 72% of owners say that their business has been impacted due to inflation, with 76% saying it has not improved or is getting worse. Many business owners have had to weigh keeping prices consistent for customers by eating the margin or raising prices and sharing the pain all around.

These pressures will surely push more business owners into the market to sell, just as the pandemic did two years ago. “Pandemic fatigue” was listed as moderately to extremely motivating for 43% of business owners to consider selling.

The Other Side of the Transaction

Over 5 million entrepreneurs applied for business applications in 2021, which was the largest number ever recorded by the US Census Bureau. At the same time, one in five business buyers self-reported as having come from the Great Resignation and business brokers correlated this trend by saying that 23% of inquiries came from corporate refugees or those proactively seeking business ownership. Part of what is causing pain for business owners — labor shortages — may also be the solution, as some of those “shorting” the labor market may end up buying those labor-troubled businesses.

Final Thoughts

Through these constantly shifting times, the fundamentals of business transactions still hold, whether sellers are finally letting go or buyers are excitedly entering the fray: due diligence, clean books, solid systems. 

We’ve got all sorts of exciting businesses for buyers to look at and are always open to representing sellers who think that 2022 might finally be time to ride off into the sunset. Give us a call.

5 Factors in Creating a Multiple

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5 Factors in Creating a MultipleWhile there are many ways to get a value for your business, we always point towards a professional valuation as not only the most accurate, but the one that qualifies for SBA and bank financing.  In this article we’re going to talk about five factors that professional valuation experts consider when evaluating the proper multiple for your business.

More Than Numbers

While we are never going to argue that an accountant doesn’t know numbers, we will point out that, without years of experience with business transactions, an accountant or CPA can only offer an academic valuation.  It may be accurate, but the advantage of having the knowledge and experience which comes from doing valuations regularly leads to a professional valuation that is tethered to the marketplace, and for those who are actually looking to sell a business, a number that has a relationship to the marketplace really matters.

So, let’s look at what the professionals consider for a valuation multiple that CPAs and accountants who aren’t regularly involved in business deals don’t:

1. Industry Assessment

As we saw during the pandemic, some businesses thrived. Others really struggled.  

Is your industry on an up or down trend?  Is there regulation or legislation that is pending that can really change the model of the industry?

Is the industry susceptible to supply-chain disruptions?  Weather?  Geopolitics?  Prior to 2020 these factors may have been never-never thoughts that we thought didn’t relate to Main Street businesses.  We know better now.

2. Company’s Competitive Position

As with the industry assessment, an assessor will look at whether the company is on an up, down, or stable trajectory within the local, regional, and possibly national markets.  

How is the company competing (price, quality, knowledge, customer service, etc.)?  Are any of those competitive vectors under threat from new entrants?  How?

3. Internal Trends

Just as we saw after 2008, many potential buyers are “giving a pass” to business numbers from 2020.  But that anomaly aside, what was the profitability year-on-year before 2020, and what is it now, when we are many months since shutdowns and business closings?  

4. Ownership Change Risk

With a solid team, a business should stay stable even with an ownership change.  In fact, when done right, many customers don’t even know the business has changed hands for months or sometimes years.

An assessor will look at how involved the owner is with sales and relationship management.  He/she will also look at how much recurring revenue is coming into the business, a factor that de-risks the specter of an ownership change.

5. Desirability in the Marketplace

How desirable is your business in the current climate?  For example, when the Affordable Care Act was going through the legislative process, a lot of health care related businesses didn’t go to market and buyers were adopting “wait and see” attitudes until the ink on the new laws dried.  What are market conditions around your type of business and your industry at this time?

There can be other factors to consider in valuations, depending on the industry and specific business situation, but these five factors are always considered when determining the right multiple for a business value.  Remember that before even looking at these factors the business needs to have clean books and operating manuals.

Do you have an academic value of your business and want a professional one instead?  We can help with that! Give us a call.