How the marketplace values a company

WHAT SELLERS NEED TO KNOW

How the Marketplace Values a Company

Definition of Fair Market Value

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Fair Market Value is defined as the price at which shares of common stock of a closely-held company would change hands, with both Buyer and Seller having full information about the company and neither party acting under any compulsion to complete the transaction.

Factors That Drive Value


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Financial Factors (usually the most important factors) EBITDA (earnings before interest, income taxes, depreciation & amortization)

Value of Assets (book and market value)

“Clean” Balance Sheet (good & collectible accounts receivable, good & saleable inventory, low debt to equity ratios, high working capital ratios)

Audited or Reviewed Financial Statements (not compiled)

Solid Financial Infrastructure (high level of “back office” automation & integration)

Ability to Forecast EBITDA Accurately for 3-5 Years Growth Strategies in Place and Well Documented



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Proprietary Technology/Products (Can Trump Financial Factors) Patents Sole Right to Manufacturer a Product Sole Right to Distribute a Product Protected Market Area Unique Manufacturing or Marketing Process Unique or Innovative Product or Service Superior Technology Industry Leader for Product



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Customer Base Diversity (no single customer more than 10% of revenue)

Years a Customer (the longer the better)

Written Contracts that are Transferrable (for at least a 1 year term)

Financial Strength of Customer Base (no major customers in distress)



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Suppliers No Single Supplier Dominates Purchases Major Suppliers Can Be Easily Replaced No Major Supplier Is In Financial Distress



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Management Management Infrastructure At least one layer of Management beneath Owner Company not dependent on Owner’s daily presence Succession plan in place

Resume Strength of Management Team 10+ years of experience Proven Track Record of Performance



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Employees Low Employee Turnover High Skill Level of Employees Non-Union Employee Base (preferred)



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Competitors (compare company to competitors as follows:) Size Years Established Industry Reputation Strength of Product Line Pricing of Product Line Diversity of Product Line Unionized Work Force Level of Automation



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The Industry Barriers to Entry Industry Trends Size of Marketplace Position Within Marketplace



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Risks Environmental OSHA Litigation



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Timing (sell when): EBITDA is peaking but not too close to the crest EBITDA is sustainable Debt is low Technology is stable and not in transition Management contracts in place Economy is stable Industry outlook is good

VALUATION FALLACIES…


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I can sell my Company for the same multiples as the large public companies.

Historic performance does not matter; my Company will be priced entirely on future earnings.

Companies typically sell for a multiple of sales. My industry/Company is different from other

industries/companies, so typical valuation techniques do not apply.

Timing doesn’t matter.

VALUE LOST BECAUSE…


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Too close to the Company to understand its true value.

Too removed from the M&A market to understand its pitfalls.

Failure to: Effectively present the Company’s strengths and future

earnings stream Structure purchase price to obtain the highest after-tax value Develop a comprehensive database of potential Acquirers Identify, quantify and capitalize on the synergies created with

each potential Acquirer

SELLER MISCONCEPTIONS…


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Only I can sell my Company. Nobody knows my Company better than I do.

Only companies in my industry can acquire my Business. I only need 1 or 2 potential Acquirers to complete a sale. I know what my Company is worth. Unrealistic expectations Different debt structure for Acquirer Different risk profile for Acquirer

SELLER MISCONCEPTIONS(continued)…


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I do not need to disclose confidential information about my Company in order to sell it.

My Company will sell in 6 months. My employees (customers/suppliers) will find out that my

Company is for sale and leave me. My relationship with my bank will change if they know the

Company is on the market.

The History versus Forecast Debate(Do We Value a Company on Historic Performance or Future Performance?)


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The Acquirer’s Argument for History I will only pay for what you have done with the Company,

not for what I will do with the Company. Forecasts, no matter how diligently prepared, do not

reliably predict future performance.

The Seller’s Argument for Forecast I have positioned the Company to achieve the benefits

you will reap. I know my market better than anyone else, if I can’t

forecast my future performance then no one can.

The History versus Forecast Debate(Do We Value a Company on Historic Performance or Future Performance?)


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The Acquirer’s Argument for History Historic performance is the only reliable indication of

value since it is based on fact not conjecture. Only Companies with strong market share are in a

position to forecast with any degree of reliability.

The Seller’s Argument for Forecast Historic performance is useful to establish trends, but the

Company is worth the sum of its history and its potential. My Company’s reputation has created its own unique

position in the marketplace.

5 Critical Points to Remember When Selling Your Company


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1. Make your decision to sell very carefully and deliberately. If you are not ready to sell your Company, DO NOT PUT IT ON THE MARKET.

2. Position your Company properly before placing it on the market. Your Company should be placed on the market just before it peaks (not before and not after). Correct problems that could jeopardize your sale.

3. Conduct due diligence on your Company before the Acquirer does. Know your problem areas before the Acquirer discovers them.

5 Critical Points to Remember When Selling Your Company


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4. DISCLOSE ALL PROBLEMS to the Acquirer up front. No problem is too big to resolve if it is disclosed at the beginning of the selling process. No problem is too small to collapse the negotiations if it is disclosed late in the selling process.

5. Do your homework up front. There are no shortcuts in the selling process. The time you spend in the preparation process, and the quality of that preparation process, will largely determine your success.

5 Biggest Mistakes inSelling Your Company


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1. Unrealistic purchase price expectations. Understand what your Company is worth. Do not go through this process if you are unwilling to accept a realistic purchase price.

2. Not understanding the tax implications of selling your Company and your lifestyle needs post closing. Understand the after tax proceeds of the sale of your Company and what you need to maintain your lifestyle post closing.

3. Poor preparation (or no preparation) of the Descriptive Memorandum. The DM serves the dual purpose of conducting due diligence on your Company (before the Acquirer does) and providing the foundation for the Acquirer’s Letter of Intent.

5 Biggest Mistakes inSelling Your Company


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4. Not creating a market for your Company. A few Acquirers is no Acquirers. Understand who is a potential Acquirer for your Company and develop a comprehensive database of potential Acquirers in order to optimize purchase price.

5. Not enough emphasis on Confidentiality. Do not tell anyone (other than 3rd party advisors) that your Company is for sale.

5 Ways to PositionYour Company for Sale


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1. Understand the current market value of your Company.2. Prepare a SWOT (Strengths, Weaknesses,

Opportunities, Threats) analysis on your Company.3. Prepare a 5-year trend analysis on your Company.4. Prepare a 5-year forecast for your Company.5. Prepare a Business Plan that details how you would

grow your Company over the next 5 years.

How the marketplace values a company

Business

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