Part IX In Our Series on Business Valuation: The Impact of Technology and Developed Processes
Welcome back to our Business Valuation series! In the intricate cogs of business valuation, methodologies are the machines that guide the evaluation process. Market methodologies, in particular, focus on transactions and the multiples they generate. Picture this: two companies down the street from the other, operating in the same industry, both raking in the same amount of revenue and generating the same cash flow. One sold for a multiple three times more than the other. The question arises: What sets them apart? Why are they valued so differently? This month, we take a look into the critical roles that technology and developed systems play in shaping the valuation of a business listing. Beyond the Balance Sheet: Embracing Technology Diving into the intricacies, we find that technology can have a big impact on valuation. It’s not just about the financials; it’s about whether a company has embraced technology. Take the example of a plumbing company. Some send out invoices immediately after service calls, seamlessly integrating technology into their operations. On the flip side, others might take weeks to get a bill out the door. Some have a customer portal where customers can access all documents/invoices/photos, etc. of the jobs performed. Others do everything by hand. Technology as a Value Driver At Transworld of the Gulf Coast, we understand that technology and developed systems are more than just operational tools. They’re significant value drivers. The dichotomy between the ‘blue-collar handshake’ businesses and those with well-documented systems is evident. It’s the difference between chaos and order, between the inefficiency of manual processes and the streamlined workflows powered by technology. Documenting Processes: The Unseen Advantage How a business owner navigates processes, from sales to fieldwork, is a crucial aspect of valuation. Are systems well-documented? Are there processes in place for new hiring or industry-specific tasks? These questions become pivotal in assessing the ‘turnkey’ nature of a business — its readiness for a seamless transition. The Technological Tapestry We see businesses operating on spreadsheets and manual tickets with no accounting or inventory software compared to those leveraging sophisticated and integrated enterprise systems. The impact of technology on businesses is more than surface level — it’s about staying relevant, efficient, and, ultimately, sustainable. It can be the difference between a traditional business that is linked to current owners and a turnkey operation that can be transitioned without missing a beat. The more seamlessly a business integrates technology into its operations, the more attractive it becomes. While technology might not be a deal-breaker, it certainly reinforces the price or prompts a reevaluation of the effort required for process creation. Pitfalls and Opportunities There is a delicate balance in factoring in technology and developed processes. Some businesses intentionally remain ‘low tech’ to keep their workforce content. Yet, in doing so, they might be jeopardizing their value in a market that increasingly values efficiency and modernity. The example of a business that resisted technological evolution only to face challenges later paints a cautionary tale. Conclusion: Navigating the Digital Frontier In a world where businesses are increasingly defined by their technological footprint, the impact on valuation is significant. The story isn’t just in the numbers; it’s in the digitized processes, the efficiency gains, and the adaptability to modern business operations. As you evaluate your business, ask not just what it’s worth today, but how well it’s positioned for the technological landscape of tomorrow. Stay tuned for the next installment in our Business Valuation series, where we’ll unravel yet another layer of the art and science of valuing businesses – demonstrating the realization of economies of scale and scalability. Until then, embrace technology, document your processes, and chart a course toward a more valuable and forward-thinking business. If you need help evaluating your technology and/or your processes and operations, we can help you prepare so that you can maximize your valuation when the time comes to consider a sale. About Transworld Business Advisors of the Gulf Coast Transworld Business Advisors of the Gulf Coast covers the northern Gulf Coast along the I-10 & I-65 corridors with special emphasis in Mobile, AL to New Orleans, LA. We strive to be the top business brokerage firm in the area and leverage our extensive experiences and our international Transworld platform to run confidential and competitive business sales processes. We help entrepreneurs to buy a business or sell a business, with a focus on helping family-owned and closely held businesses with their strategic plans for the future. Transworld offers a wide range of advisory services to the northern Gulf Coast Region, including Alabama, Mississippi, Louisiana and the Florida panhandle, that are tailored to fit your business needs, whether you’re buying, selling, preparing to sell, or franchising. If you are ready to sell or would like assistance getting your business ready to sell, reach out today at Gulfcoast@tworld.com.
Part VIII: In Our Series on Business Valuation: Quality of Books
The Importance of Solid Financial Records in Business Valuation Welcome back to the eighth part of our series on business valuation. In this installment, we delve into the critical topic of financial records and their impact on the valuation process. Quality records are imperative to a smooth sales process when you want to build trust, maximize price and reduce obstacles. The Foundation of Trust and the Power of Accuracy Trust is paramount in the world of business transactions. Building trust among all parties involved—buyers, sellers, and intermediaries like brokers—is essential for a smooth and successful deal. At the heart of this trust is the quality and accuracy of financial records. The importance of having accurate and up-to-date financial records cannot be overstated. This includes regular accounting and bookkeeping, ideally on a monthly basis. These records serve as the foundation upon which trust is built. Here’s why they matter: Trust and Credibility: Accurate financial records enhance the credibility of the seller. Buyers are more likely to trust information that is well-organized, consistent and up-to-date. This trust is crucial for the negotiation and due diligence phases of a deal. Faster Due Diligence: Well-maintained financial records can expedite the due diligence process. Buyers are more likely to move quickly when presented with clean, organized records that can be easily verified. Maximized Value: When a seller can demonstrate that their financial records are reliable and transparent, it often results in a higher valuation. Buyers are willing to pay a premium for businesses with well-documented financial histories. The Role of Professional Accounting Having a professional accountant or CPA involved in the financial management of the business is almost always beneficial to a business, especially when you are ready to sell. While not always mandatory, having a certified accountant’s oversight lends an extra layer of credibility to the financial records. It signals to potential buyers that the business takes financial reporting seriously. Monthly Closings and a Closing Checklist Monthly financial closings are highly recommended. They provide regular opportunities to ensure that financial records are accurate and complete. Additionally, having a closing checklist can help ensure that nothing is missed during these crucial periods. The Buyer’s Perspective Buyers often approach deals with a degree of skepticism, as they should. They conduct due diligence to validate the information provided by the seller. If financial records are not in order or appear inconsistent, it can lead to delays, renegotiations or even the cancellation of the deal. This can be avoided by maintaining meticulous records. Final Thoughts In the complex world of business valuation and transactions, trust is the currency that facilitates deals. Solid financial records play a pivotal role in building and maintaining this trust. Whether you’re a buyer, seller or intermediary, recognizing the value of accurate financial records is key to a successful and lucrative transaction. As we continue our journey through the world of business valuation, remember that the efforts invested in maintaining accurate financial records can pay substantial dividends when it comes time to sell or buy a business. Stay tuned for the next installment in our series, where we’ll explore another essential aspect of business valuation. About Transworld Business Advisors of the Gulf Coast Transworld Business Advisors of the Gulf Coast covers the northern Gulf Coast along the I-10 & I-65 corridors with special emphasis in Mobile, AL to New Orleans, LA. We strive to be the top business brokerage firm in the area and leverage our extensive experiences and our international Transworld platform to run confidential and competitive business sales processes. We help entrepreneurs to buy a business or sell a business, with a focus on helping family-owned and closely held businesses with their strategic plans for the future. Transworld offers a wide range of advisory services to the northern Gulf Coast Region, including Alabama, Mississippi, Louisiana and the Florida panhandle, that are tailored to fit your business needs, whether you’re buying, selling, preparing to sell, or franchising. If you are ready to sell or would like assistance getting your business ready to sell, reach out today at Gulfcoast@tworld.com.
Part VII in Our Series on Business Valuation – Understanding Viable Growth Potential and Pro Forma
Welcome back to the seventh installment of our series on business valuation. In previous articles, we’ve explored various aspects of evaluating a business’s worth, from market and industry conditions to company maturity and reputation. Today, we delve into the critical topics of viable growth potential and pro forma analysis, shedding light on the future outlook that underpins a business’s value. Looking Beyond the Past As a prospective buyer, one of the foremost questions on your mind is likely, “What does the future hold for this business?” While historical financial performance is undoubtedly essential, the forward-looking aspects truly drive a business’s value. After all, investments are made with an eye on future returns, not past achievements. Verifiable Growth Potential: The Key to Confidence When assessing a business’s growth potential, the term “verifiable” is paramount. It’s all too common to encounter sellers armed with ambitious projections that lack any semblance of realism. In such cases, discerning the genuine growth potential becomes an intricate task. One method of verifying growth potential is to examine a business’s historical track record. Have they consistently expanded whether through opening new locations or expanding their product or service offerings? Trends like these suggest that the company’s growth is not a mere pipedream but grounded in past achievements. In cases where a business is entering uncharted territory, such as launching a new product line, the verifiability of growth becomes more complex. In such instances, a comprehensive understanding of the industry, market research and feasibility studies become vital. The more data points you can collect to support growth assumptions, the more confidence you can have in the business’s future prospects. The Role of Pro Forma Analysis Pro forma analysis plays a pivotal role in assessing growth potential. It involves creating financial projections based on various scenarios, often incorporating assumptions about future revenue, expenses and other key metrics. Pro forma statements are not limited to the income statement; they can extend to balance sheets and cash flow statements, offering a holistic view of a business’s future financial health. Consider a scenario where a business has secured a substantial contract expected to boost revenues significantly. Pro forma analysis helps assess the impact of this contract on the business’s financials. It allows you to gauge whether the assumptions underpinning this growth are realistic and sustainable. Furthermore, pro forma analysis helps uncover potential bottlenecks, such as the need for additional working capital to support increased operations. The Franchise Model: A Proof of Concept In the world of franchising, verifiable growth potential often takes on a different dimension. Franchise businesses benefit from a proven concept that has been replicated successfully across multiple locations. Franchisees can look to historical data from other branches to gauge their potential success. Franchises are appealing to buyers precisely because they come with a built-in model for success. However, it’s essential to ensure that the franchisee adheres to the established system. Deviating too far from the proven formula can lead to a loss of success. Therefore, when considering the purchase of a franchise, evaluating the franchise’s historical performance and the level of conformity to the established system is crucial. Contracts and Exclusive Agreements: The Verifiable Edge Contracts and exclusive agreements can significantly impact a business’s growth potential. For instance, a company may have secured a multi-year contract with a major client, ensuring a stable stream of revenue. In this case, the verifiability of the contract’s terms and the likelihood of its renewal are pivotal factors. Similarly, a business with exclusive agreements to distribute or manufacture certain products can enjoy a competitive advantage. Pro forma analysis can help assess the long-term impact of these agreements on the business’s financials, allowing buyers to make informed decisions. Final Thoughts In the world of business valuation, understanding a company’s viable growth potential and conducting a thorough pro forma analysis are non-negotiable steps. Whether you’re considering a startup, an established business or a franchise, the ability to verify growth assumptions and project future financial performance is key to making sound investment decisions. As you navigate the complex terrain of business valuation, remember that the devil is in the details. The more robust your data, the more accurate your projections, and the more confidence you can have in the business’s potential. Stay tuned for the next installment in our series, where we’ll continue to demystify the world of business valuation by talking through the importance of the quality of your books and accounting records. If you missed last month’s article, take a look at our discussion of Evaluating Year-to-Date Sales and Profit – A Crucial Aspect of Business Valuation About Transworld Business Advisors of the Gulf Coast Transworld Business Advisors of the Gulf Coast covers the northern Gulf Coast along the I-10 & I-65 corridors with special emphasis in Mobile, AL to New Orleans, LA. We strive to be the top business brokerage firm in the area and leverage our extensive experiences and our international Transworld platform to run confidential and competitive business sales processes. We help entrepreneurs to buy a business or sell a business, with a focus on helping family-owned and closely held businesses with their strategic plans for the future. Transworld offers a wide range of advisory services to the northern Gulf Coast Region, including Alabama, Mississippi, Louisiana and the Florida panhandle, that are tailored to fit your business needs, whether you’re buying, selling, preparing to sell, or franchising. If you are ready to sell or would like assistance getting your business ready to sell, reach out today at Gulfcoast@tworld.com.
Part VI in Our Series on Business Valuation: Evaluating Year-to-Date Sales and Profit – A Crucial Aspect of Business Valuation
In our ongoing exploration of key value drivers when selling a business through Transworld of the Gulf Coast, we shift our focus to a critical financial factor – year-to-date sales and profit. After delving into the significance of historically strong sales and margin growth in the previous article, we’re now diving into the realm of current performance metrics. So, let’s discuss the relevance of year-to-date figures and how they factor into the business valuation equation. Understanding the Transition from Historical to Current Data The journey from a historical valuation to a contemporary assessment of a business’s worth is marked by a shift in perspective. While historical data, often spanning three to five years, provides insights into the business’s past performance, the focus now pivots to the present moment. Year-to-date (YTD) sales and profit figures shed light on how the business is currently faring – an important consideration for potential buyers. The Importance of YTD Sales and Profit When a business is up for sale, prospective buyers want to know about more than just its past success. They’re eager to understand its current standing and potential for future growth. This is where YTD sales and profit figures come into play. These numbers provide a real-time snapshot of the business’s financial health and its trajectory in the current market landscape. Addressing Immediate Concerns One of the first questions buyers ask when considering a potential acquisition is, “How is the business performing right now?” YTD figures allow sellers to provide an answer based on the most recent financial data. Whether the business is experiencing growth, maintaining stability or facing challenges, these figures offer transparency and address the immediacy of a buyer’s concerns. Assessing Alignment with Historical Performance A key aspect of evaluating YTD sales and profit is assessing how they align with historical performance. Are the YTD numbers consistent with the business’s historical trends? Are they exceeding or falling short of previous benchmarks? By comparing current figures with the historical context, buyers gain insights into the business’s ability to maintain its success trajectory. Real-Time Data for Informed Decision-Making The availability of up-to-date financial information is crucial for both buyers and sellers. Sellers benefit from demonstrating their business’s current strength, while buyers use this information to gauge whether the business aligns with their investment goals. Transparent YTD figures empower both parties to make informed decisions based on the latest financial realities. Navigating Challenges and Seizing Opportunities While it’s ideal for YTD sales and profit to match or exceed historical performance, there are instances when businesses face challenges that lead to a dip in these numbers. This isn’t necessarily a deal-breaker. Instead, it can offer an opportunity for sellers and buyers to engage in open conversations. Sellers can explain the reasons behind any setbacks and outline their strategies for recovery, reassuring potential buyers about the business’s potential. Year-to-date sales and profit figures are a pivotal part of the business valuation puzzle. They offer a real-time glimpse into a business’s financial health and its capacity for future growth. Transparency in sharing current performance data fosters trust between sellers and buyers and enhances the overall transaction process. By accurately representing the business’s current position, sellers set the stage for informed decision-making and a successful business sale. Transworld of the Gulf Coast and Our Network of Experts At Transworld of the Gulf Coast, we emphasize to our clients that gathering accurate and up-to-date YTD sales and profit numbers is a pivotal step in the business sale process. We have a full complement of resources and a network of seasoned experts, including accountants and CPAs, at your disposal to help you if you need it. We can help you track financial data, ensuring that your YTD figures are precise and comprehensive. We want you and your potential buyer to feel confident that you are presenting a transparent and accurate snapshot of your business’s current financial standing. With the support of our advisors, you can seamlessly navigate the complexities of YTD data gathering, contributing to a smooth and successful business sales journey. Stay tuned for our next blog, where we’ll explore another crucial value driver in the business sale – Verifiable Growth Potential and Pro forma. If you missed last month’s article, take a look at our discussion of The Impact of Historically Strong Sales and Margin Growth on Business Value. About Transworld Business Advisors of the Gulf Coast Transworld Business Advisors of the Gulf Coast covers the northern Gulf Coast along the I-10 & I-65 corridors with special emphasis in Mobile, AL to New Orleans, LA. We strive to be the top business brokerage firm in the area and leverage our extensive experiences and our international Transworld platform to run confidential and competitive business sales processes. We help entrepreneurs to buy a business or sell a business, with a focus on helping family-owned and closely held businesses with their strategic plans for the future. Transworld offers a wide range of advisory services to the northern Gulf Coast Region, including Alabama, Mississippi, Louisiana and the Florida panhandle, that are tailored to fit your business needs, whether you’re buying, selling, preparing to sell, or franchising. If you are ready to sell or would like assistance getting your business ready to sell, reach out today at Gulfcoast@tworld.com.
Part V in Our Series on Business Valuation: The Impact of Historically Strong Sales and Margin Growth on Business Value
Part V in Our Series on Business Valuation: The Impact of Historically Strong Sales and Margin Growth on Business Value Welcome back to our series on value drivers in preparing a business for sale. Last month, we talked about the role of company maturity reputation in driving business value. For the next several months, our discussion will move more into the financial criteria that drive business valuations. This month, we will discuss the significance of historically strong sales and margin growth in the context of selling a business. We’ll explore what this means, how it impacts a business’s value and why accurate historical data is crucial for maximizing the sale of your business. Defining Historically Strong Sales and Margin Growth When evaluating a business’s financial performance, historically strong sales and margin growth refer to the examination of annual financial data, typically spanning three to five years. These financials include tax returns and may also encompass additional records issued by CPAs. By analyzing sales trends and margin growth over this period, potential buyers gain valuable insights into a company’s financial health and growth trajectory. Sales Analysis One of the critical aspects of historical sales data is understanding the components of sales and the factors driving growth. Buyers want to know if the business is growing organically through increased demand for products or services or if growth is a result of acquisitions. Additionally, they may look at sales trends by location, business segments or product lines to determine which areas contribute most to revenue generation. Customer Concentration Another vital element of sales analysis is customer concentration. Buyers seek businesses with diverse and broad customer bases to reduce risk and dependence on a single customer or a few key clients. Understanding customer concentration allows buyers to assess the sustainability and stability of future revenue streams. Impact on Business Value Historically strong sales growth demonstrates a thriving business with the potential for continued success. It indicates that the company’s products or services are in demand, and its market presence is expanding. Such positive sales trends can significantly enhance the business’s value and attractiveness to potential buyers. Margin Growth Analysis In addition to sales growth, margin growth analysis is equally crucial. Profit margins provide insights into the company’s profitability and efficiency. A business may experience increasing sales but declining profits if costs are not well managed. Conversely, steady sales growth with rising profit margins suggests improved operational efficiency and financial health. Buyers pay close attention to margin growth because it directly impacts the business’s bottom line and potential return on investment. A company with consistent sales growth and healthy profit margins is more likely to command a higher selling price and valuation multiple. Accuracy and Reliability of Historical Data To achieve maximum value during a sale, keeping accurate and comprehensive historical records is critical. Buyers rely on these records to assess the business’s financial health and forecast future performance. Inaccurate or incomplete data can raise red flags and erode buyer confidence, potentially leading to a lower valuation or even deal failure. Historically strong sales and margin growth are powerful value drivers when selling a business. Buyers seek businesses with a track record of sustainable growth and healthy profit margins, indicating a promising investment opportunity. As a business owner preparing to sell, it is essential to gather and present accurate historical financial data to demonstrate the company’s growth potential and maximize its value in the market. By understanding and leveraging these value drivers, you can position your business for a successful and lucrative sale. About Transworld Business Advisors of the Gulf Coast Transworld Business Advisors of the Gulf Coast covers the northern Gulf Coast along the I-10 & I-65 corridors with special emphasis in Mobile, AL to New Orleans, LA. We strive to be the top business brokerage firm in the area and leverage our extensive experiences and our international Transworld platform to run confidential and competitive business sales processes. We help entrepreneurs to buy a business or sell a business, with a focus on helping family-owned and closely held businesses with their strategic plans for the future. Transworld offers a wide range of advisory services to the northern Gulf Coast Region, including Alabama, Mississippi, Louisiana and the Florida panhandle, that are tailored to fit your business needs, whether you’re buying, selling, preparing to sell, or franchising. If you are ready to sell, or you would like assistance getting your business ready to sell, reach out today at Gulfcoast@tworld.com.
Part IV in Our Series on Business Valuation: The Role of Company Maturity and Reputation
As we have been addressing in our series on business valuation, when determining the market value of your business, several factors come into play. One crucial aspect is the maturity and reputation of the business. In this article, we will delve deeper into how company maturity and reputation impact overall valuation and explore the implications for business owners and potential buyers. The Value of Company Maturity in Business Valuation When evaluating a business’s maturity, several key indicators come into play. The duration for which a company has been in operation, its growth trajectory and its current stage are all important considerations. For high-growth businesses in their early stages, the expectation of continued growth often leads to higher valuation multiples. However, for more mature businesses with lower growth rates but consistent performance, their stability and reliability can also contribute to a favorable valuation. The Role of a Company’s Reputation The reputation of a business holds significant weight in its valuation. While the number of years in business may establish credibility, a tarnished reputation can undermine its value. Today, with online platforms like websites, social media and review sites, a company’s reputation is more accessible than ever. Buyers often rely on these platforms to form an impression of a business before engaging further. Therefore, it becomes crucial for businesses to ensure their online presence aligns with their desired image and that they actively address any negative feedback. Aligning Maturity and Reputation Achieving synergy between a company’s maturity and reputation is vital for maximizing its value. A long-established business with a strong reputation can attract higher-quality buyers and potentially command a premium price. On the other hand, businesses that have been around for an extended period but have allowed their reputation to suffer may face challenges in securing favorable valuations. It is crucial for business owners to actively manage their reputation and address any issues promptly to maintain and enhance their value. The Risks of Prolonged Inactivity in Reputation Management While longevity in business can be seen as an asset, it is essential to balance it with energy, passion and continued growth. If a business’s energy and enthusiasm wane over time, competitors may seize the opportunity to gain market share. Additionally, customers and employees might gravitate toward more dynamic alternatives. Business owners must assess their trajectory honestly and consider re-energizing their operations if necessary to maintain their value and competitiveness. The Impact of Employees on Business Valuation The quality and tenure of employees also play a crucial role in a company’s value. Long-term employees can bring stability, expertise and deep relationships with customers and suppliers. These factors contribute positively to the business’s reputation and overall value. Investing in a strong employee base is a worthwhile endeavor for business owners looking to enhance their company’s worth. The maturity and reputation of a business are integral factors in its valuation. An established track record, combined with a positive reputation, can significantly impact a company’s desirability and potential sale price. Business owners must actively manage their online presence, address any issues that arise and ensure they maintain energy and passion in their operations. By aligning maturity and reputation, businesses can maximize their value and attract high-quality buyers, ultimately achieving successful transactions. If you need support in preparing your business for sale, our team can help you evaluate your business, implement strategies to maximize your sale price and help you navigate the process from start to finish. We have people on our team who can also help you with reputation management, HR issues, etc. in order to get you on the right path for a successful transaction. About Transworld Business Advisors of the Gulf Coast Transworld Business Advisors of the Gulf Coast covers the northern Gulf Coast along the I-10 & I-65 corridors with special emphasis in Mobile, AL to New Orleans, LA. We strive to be the top business brokerage firm in the area and leverage our extensive experiences and our international Transworld platform to run confidential and competitive business sales processes. We help entrepreneurs to buy a business or sell a business, with a focus on helping family-owned and closely held businesses with their strategic plans for the future. Transworld offers a wide range of advisory services to the northern Gulf Coast Region, including Alabama, Mississippi, Louisiana and the Florida panhandle, that are tailored to fit your business needs, whether you’re buying, selling, preparing to sell, or franchising. If you are ready to sell, or you would like assistance getting your business ready to sell, reach out today at Gulfcoast@tworld.com.
Part III in Our Series on Business Valuation: Industry Conditions
As we continue our series on Business Valuation, we go to Transworld of the Gulf Coast M&A Specialist, Bill Whiston, for his perspective on industry conditions and how they impact the value of your business. Bill has many years of experience as a business owner and business advisor and is our go-to resource for our M&A transactions. What Industry Conditions Drive Business Valuation? Understanding industry conditions is not an easy feat. To generalize is difficult as every industry has its own specific value drivers and industry conditions. In previous articles, we’ve talked about economic conditions, but industry conditions are largely based on the following factors: Industry Potential for Growth Growth potential in an industry is a significant value driver when it comes to determining the value of your business. When you look at different industries, like the restaurant industry, for example, trends impact value. During the pandemic, when restaurants were forced to close, clearly the industry conditions had a negative impact on valuation. This year, the National Restaurant Association predicts growth in the industry as higher menu prices drive revenue. But there are also challenges, including higher food prices and increased competition. In other industries, let’s say, ones like magazine publishing or coal mining, there is a dim outlook as these industries have been shrinking over time and are forecast to continue that pattern. These industries are clearly at a disadvantage in terms of business valuation as it is difficult to attract buyers to a dying sector. Leader.com ranks healthcare, personal care and services, travel leisure and hospitality, and commercial and residential construction among the fastest-growing industries this year. While this is important information, you should also consider the historical growth over time and long-term trends for the future. Technology is another factor that can determine the potential value of a business and its future growth potential. How much risk does technology have in the industry to change, influence or perhaps make it obsolete? Note on Industry – Valuation Multiples While the focus in this article surrounds Industry Conditions, there is no question that different industries drive very different valuation multiples. For example, the tech sector drives incredible (illogical) multiples. Telecommunications and fiber optics almost always require customers to pay for a subscription and often have multi-year contracts. Since the revenue is locked, a buyer knows that revenue is going to continue without having to heavily adjust their risk factor of achieving such future cash flows Take the opposite end of the scale. Think project-based industries (such as homebuilding or business brokerage). Most of the time these businesses’ value is derived off the pipeline of the business. Therefore, the multiples in these industries are much lower. That said, if a business in a particular industry can think outside the box and find ways to take a predominantly project-based business and transform it to a recurring revenue model, then your business value can outperform others in the general industry. We had one client who was a wedding photographer and decided to pivot to team sports and school pictures. That change created a much more valuable business model for someone else to purchase and scale, and it sold for a much higher multiple than its industry peers. What is the total market size potential (in terms of $ spend)? Sometimes, for instance, we run across companies that are so niched their entire U.S. market demand might only be $25 million a year. On the other hand, the industry could be a $100 million or multi-billion industry. When you identify the market potential, you have an idea of know how much of the pie there is out there to go out and win. Does the Industry Have High Barriers to Entry? In looking at a business from a buyer’s perspective, it is important to understand what you need to know to enter the industry. Things to consider: These factors can create barriers to entry, so you need to understand how difficult or possible it is to overcome them. What is the competitive environment in that industry look like today, and in the future? If the industry is fragmented (made up of a bunch of small players), it can be appealing to larger companies or private equity firms that would like to expand their market in a region. It often makes more sense for them to acquire smaller companies that already have a significant market share in a particular region rather than expanding into that market as a competitor. If the industry is consolidated already or experiencing consolidation, it can make it less opportune for someone to come in and acquire. It. Another factor to consider is M&A activity. Is it robust and full of strategic buyers or not? As we like to say, “One buyer is no buyer,” so the more activity you have, the more competition there is and the higher that competition drives the value of businesses in that industry. How Transworld Helps You Get the Best Deal as a Seller Our advisors help you understand the conditions that exist around your industry. Most of these are not within your control, so navigating the conditions as they exist to help you get the best prices for your business is where we come in. We understand the different industries, how they play in your local market and who your ideal strategic buyers will be. We help you target them, create a competitive buyer field and get you the best deal possible. Within those industry conditions, we help you strategize your specific business conditions to compete in the market. Often, we talk to sellers who do not understand that they have some strong value drivers. They may have a great position within their industry, and they don’t realize exactly how to take advantage of each of their intellectual properties. For example, you can have a company that has branded and named some of its own products. It has a strong reputation in the market. But if they have not taken that name or that
Part II in Our Series on Business Valuation – Market Conditions
Part II in Our Series on Business Valuation – Market Conditions Last month, we opened the discussion on how the value of your business is generally determined. This month, in Part II, we will delve into our series discussing specific value drivers you should consider when preparing to sell your business starting with market conditions. When we meet with a prospective seller, we spend a great deal of time reviewing valuation drivers. As we navigate the sales process and prepare your business for sale, there are variables you can control and some you cannot. Market conditions and interest rates are important to consider, but they are not in your control. So, decisions often come down to timing and determining the pros and cons of the sale in the conditions that exist now and what we can reasonably anticipate over the next several months. Understanding Market Conditions Generally speaking, when people think of market conditions, they tend to think about the stock market. With the volatility of the stock market, it is difficult to determine what will happen next. When talking about small privately held businesses, it is not as easy as flipping on Fox Business or MSNBC or calling a stockbroker. The private company market is not that efficient or liquid. In evaluating market conditions in privately held businesses, you must do more research and stay focused on the big picture. Yes, you’re looking at things such as the interest rate as well as the macroeconomy. Sometimes industry-related market conditions will factor in, but that’s an entirely different and distinct value driver that we will address as our topic next month. Nonetheless, one market condition on everyone’s minds lately is interest rates. Interest Rates Rising interest rates mean it’s more costly to obtain capital. And so, debt exposure is going to erode your bottom line to some extent because it impacts businesses’ free cash flow. You have to build that factor into your pro forma as you model the way a buyer will buy your business. Interest rates can also impact other types of instruments in the market. Some small business sales that are Main Street transactions involved a seller financing component. What that means on a seller promissory note is that you may ask the seller to lend some money to buy the business. Sometimes that’s 5% of the deal. Sometimes it’s 80% of the deal. Right now, with rates going up, sellers can expect better returns on their loans when they sell their businesses. Here is another way to consider the impact of higher interest rates from a seller’s point of view. If you reinvest closing proceeds with an interest component, your monetization of the sale now can take advantage of better returns at substantially less risk (than owning the business). Then, if you invest your closing proceeds at higher interest rates, and you seller-finance a portion of the sale, you could be coming out much better over the long term than perhaps only six months ago. If the seller note repayments go as planned, which they typically do, (if structured correctly, the seller note default risk is significantly lower than you might expect) you as a seller might be surprised that the timing of a sale is actually still favorable. Don’t fall into the trap of ‘doom and gloom’ news media. Stay level-headed and crunch the numbers with your advisors. Interest Rates and Buyers While we are in a strange time economically, over the long term, interest rates still aren’t that expensive. The cost of debt is cheaper than the cost of equity, so there are a lot of reasons why small business transactions are going to see a healthy number of deals to go through over the next year or so. Do Not Rise and Fall with Interest Rates As buyers, one thing that is important to understand is that interest rates should not make or break the deal. While rates and other variables can impact your bottom line, the impact may not be as big as some other major event that can happen in this business overnight. So, it is important to know that while higher rates don’t necessarily help the valuations from a seller’s perspective, if a buyer is looking for a certain business and it comes across the table at a reasonable price, it can still be a great opportunity regardless of the short-term rate conditions. Additionally, buyers can later refinance or pay it off. The business should be able to pay the debt service with a healthy cushion (margin of safety) or you should not be buying it, right? Supply and Demand Supply and Demand is another component that is not within your control. Right now, the supply of quality businesses on the market is still historically low. If you are looking to time the market as a business owner, you really need to be considering selling sooner rather than later before the vast majority of the Baby Boomers decide to put their businesses up for sale. But as far as competitive forces and scarcity of inventory, market conditions are still really good for a seller. Coping with Unexpected Events Coming off a very impactful pandemic and a volatile social and political climate, Transworld has helped people navigate an unpredictable world environment. While market conditions and interest rates always lead the conversation, the pandemic introduced variables that changed the nature of businesses overnight. We have been able to help a lot of businesses get out of situations that were tough, and some businesses that thrived during COVID-19 found that it was a good time to sell. Overall, the trend of a lot of these small businesses that had good foundations is that the market, as we got out of the pandemic, came back and profits actually increased. Transworld’s Role in Navigating Market Conditions with a Seller As experienced business advisors, one of the first things we do with a new seller is to set realistic expectations of the selling process and
What is My Business Worth?
What is my business worth? This is the hardest question to answer for any business. Generally, when business owners think about the value of their businesses, especially if they are thinking about selling, there is an emotional driver that is usually quite different than the actual value. It is important to understand how market value is determined, how your records reflect the value of your business and ways you can maximize what you can get for it when you are ready to sell. This is a process, and when you plan ahead, know the market drivers and properly prepare your documentation, you will be satisfied that you can seek a fair price for all of your hard work growing and running your business. Over the coming months, we are going to break down how to identify what your business is worth, how to maximize its value and the steps you will need to take to get ready for a confident sale. The Emotional Value of Your Business One of the greatest challenges clients experience when they decide to sell their business is separating the emotional value from the true market value when trying to set a reasonable expectation for a sale price. Unfortunately, the value is not always what you initially think it should be. And there could be a hundred reasons why from the economy, location and industry to the time in business, proper record-keeping or supply chain issues (we all know COVID-19 did a number on many businesses due to supply and logistical issues, right?). One way to combat the emotional commitment to a sale price is to find an experienced business advisor whom you trust to be invested in your best interest, work with you to get the best price and be honest if your expectations are not realistic in the current marketplace. Trusting Your Business Advisor Our business advisors have a wide variety of expertise, work history, educational experiences and personalities. As a team, we have every tool you need to successfully sell your business. We are in it with you, and we do not want you to sacrifice a better price for a quick sale. If you are not ready, if you have room for improvement and are willing to put in the effort, we will stick with you until you are prepared and confident. Take a look at a “Perfectly Executed Business Exit,” in which we got an optimal sales price after investing some sweat equity into a client to ensure the best result. One thing we hate to see is when a client has emotionally set their expectations at a price that is realistically out of reach. There are times, for example, when a client wants $1 million for the business, and we know it is going to top out around $750,000. We have put a business on the market at the insistence of a client only to get the offer of $750,000 and have the client holding out for the cool million. We know it needs to come down, but the client has a fear of missing out on a higher sale price. So, what do you do? As the saying goes, the market price is what you can actually sell it for. We work to help our clients avoid wasting time with unrealistic expectations or a fear of missing out. Improving Your Opportunity for a Higher Sales Price Often, we see some actions you can take to positively affect your business. While this might not be a quick solution, if you follow the process, take the business adviser’s advice and put in the time and effort, you’re going to be in a better position for us to be able to sell your business. Our advisors want to help put you in a position to get what you want and find those premium multiples. Some of the efforts will be easy, and some won’t. Some situations may be out of your control, and so timing can be a factor. We can guide you through the process and peel the onion back so that you can move the needle. Preparing Your Business for Sale If you are thinking of selling your business, planning ahead is a good idea – as much as a year or two even. And it is a very good idea to engage with a business advisor during that time. Our business advisors can become accountability partners in an informal capacity (no fee) or a more formal capacity with structure, planning and goal-setting (fees apply). Investing time and money into your business now can yield up to a 50% increase in the valuation of your business from an original valuation before entering a preparation program. We find that those who engage us during the preparation process get a higher return, are more confident in the process and are better able to separate emotion from the transaction. A little bit of time, effort and money now is more than worth it when you get the price you are looking for. Common Value Drivers Going forward, we are going to break down the common value drivers you need to consider when preparing to sell your business. These include: · Market Conditions and Interest Rates · Prevailing Industry and Economic Conditions · Company Maturity and Reputation · Historically Strong Sales and Margin Growth · Year-to-Date Sales and Profitability Trends (latest LTM EBITDA) · Verifiable Growth Potential and Pro-forma · Quality of Books and Accounting Records · Technology Usage and Developed Systems · Demonstrated Realization of Economies of Scale · Recurring Revenue Streams · Customer Base and Contracts · Documented Operating Expertise, Systems and Procedures · Branding, Intellectual Property, Marketing and Asset values · Facilities · Structure of a Sale · Owner Transition · Management Team, Human Capital and Culture · Risk Premiums (Size, Control, Resale, Etc.) · Barriers to Entry · Ability to Attract Multiple Prospective Buyers · Contractual Obligations (Franchises, Leases) · Negotiation Skills of Stakeholders Stay tuned as we address each of these drivers and more to help you understand the best ways to price and sell your business. If you are struggling with