Mergers and acquisitions can be stressful for entrepreneurs who have invested blood, sweat and tears in their businesses — or second-generation owners who are selling their parents’ legacies. Setting the asking price and understanding the deal terms, including complex tax matters, can be overwhelming. Fortunately, a business valuation professional has the financial knowledge and real-world experience to help maximize the selling price and minimize the guesswork.

Preparing for sale

Valuators understand the relationship between risk and return as well as factors that affect value. So they’re equipped to assist in making companies more attractive acquisition candidates. Before a business goes on the market, a valuation pro can help address the following critical items:

Financial statements. Audited financial statements offer prospective buyers greater assurance than reviews, compilations or internal statements. With private businesses, however, what’s reported can be different from what a buyer will get. Valuators can compile schedules of unusual, nonrecurring and discretionary adjustments to the financial statements. They also can identify non-operating assets and help businesses sell less desirable assets or product lines.

Internal controls. Weak internal controls increase uncertainty and may lower selling price — especially in industries where strong controls are the norm. Conversely, taking steps such as segregating job duties, providing fraud-prevention training, enforcing mandatory vacation policies and setting up whistleblower procedures can help minimize fraud risks and, thereby, attract and impress buyers.

Key person risks. Another uncertainty is how the business will weather the seller’s departure. Some companies’ operating results would be lower without the day-to-day involvement of key owners. Valuators can brainstorm and help implement strategies to minimize key person risks, including training subordinates and decentralizing the organizational chart — not just on paper, but also in practice.

Capacity and maintenance. Buyers often base their offers, at least partially, on historic performance. Companies can optimize selling price by demonstrating positive growth trends, promising product mixes, well-maintained assets, trained staff and sufficient operating capacity to achieve forecasted results.

To facilitate a buyer’s due diligence, a valuator can help compile a selling packet that includes not only the company’s financial statements, but also tax returns, business plans and other relevant documents. However, owners should limit dissemination of this propriety information to qualified prospective buyers and consult an attorney about any confidentiality or other agreements that should be signed before such information is shared.

Analyzing market conditions

As part of the typical valuation process, valuators also can provide meaningful assistance in evaluating the marketplace, setting a reasonable asking price and researching a list of potential buyers. To lay the groundwork for an asking price, some business owners may be tempted to turn to industry rules of thumb or comparable transactions. But these resources pose numerous pitfalls. Industry rules of thumb, for instance, may be oversimplified or use ambiguous terminology. In addition, they tend to become outdated in a rapidly changing M&A marketplace.

Valuators look beyond these rudimentary formulas to estimate value. For example, they can evaluate how the company differs from comparable transactions selected from private transaction databases. They also can help estimate future earnings and assess the business’s relative risk in the marketplace. In turn, these factors can be converted into meaningful estimates of value.

Valuators also can help sellers understand what deal terms are currently in vogue, based on market trends and current tax law. For instance, a higher price might be achieved by agreeing to non-compete contracts, earnouts (in which a percentage of the purchase price is tied to future performance) or ongoing consulting agreements for a specified period after the selling owner’s departure. Use of these and other creative deal terms can help bridge the gap between a seller’s asking price and a buyer’s offer price.

Setting realistic expectations

When all is said and done, realistic value expectations are a prerequisite to selling a business. And, from that perspective, a business valuation professional can be an invaluable ally during the selling process.

(This is Blog Post #1387)