MERGERS & ACQUISITIONS – As M&A advisors, we are seeing an unprecedented number of businesses changing hands. One of the main drivers of this increase, is the large number of older business owners coming to a point where they are actively considering their succession options.
Although monetizing a life’s work can be exciting, it is also very stressful. If you are considering selling your business, it is important to have as much information as possible about what the business is worth before starting the process.
It is typical to hear about a business being sold for a certain multiple of revenue or EBITDA . Understandably, you might be curious and may even take your earnings or EBITDA and apply the same multiple to see what your business might be worth.
We refer to this as the Market Approach. What you are doing is applying a valuation metric to your business based on what you think or have heard other people are getting for their businesses.
Caution should always be exercised when using the Market Approach to ensure you are getting the highest possible price when you decide it is time to sell.
At a high level, the Market Approach is a good starting point to determine what your company is worth, but it does not tell the whole story.
There are a lot of other factors that influence the ultimate revenue or EBITDA multiple your business will sell for. This includes, but is not limited to, the size, location, potential for growth and, of course, risk.
As divestiture advisors, we typically look at two possible approaches when marketing a business, they are:
Pricing Analysis Approach
This approach is typical for businesses where there is not an established market and EBITDA is say $400,000 or less. In this case, we would likely undertake a pricing analysis to develop a supportable asking price.
If the information is available, we will use comparable transactions and then adjust the multiples based on unique features of the business being marketed.
While this may sound straight forward, setting a price carries risks with it as you can underestimate the market and leave money on the table. Alternatively, if the price is not supportable, legitimate purchasers might be turned off.
In this approach we would run an auction. The auction process is truly the Market Approach in that the vendor goes to market without setting a price. This is not to say the vendor is a passive participant in the process; however, in this case, the market decides the ultimate price and terms.
A considerable amount of work goes into analyzing the business to present it in the most positive light, marketing to potential qualified purchasers and negotiating the price and other deal terms.
Another important issue that is often misunderstood, is the target level of net assets (assets minus liabilities) that must be left in the company at closing to maintain normal business operations. This is typically known as the “target working capital”.
It is our experience that most well-run businesses will maintain more inventory than they need or be less than diligent in keeping accounts receivable levels where they should be.
This is understandable as it is easier to sell from existing stock and oftentimes business owners have a relationship with customers and let their accounts age more than they should.
M&A advisors typically assist business owners in determining what the optimal level of working capital would be so that the owner is in a better position to negotiate with the prospective purchaser on which assets should be counted as an add-on to the original offer for the business, as opposed to those that are necessary to run the business.
The objective of this is to provide support to negotiate those assets that would be considered redundant to the business operations – an obvious example of a redundant asset would be short-term investments such as marketable securities and GICs. Less obvious is excess inventory.
It is not easy to sell a business. You are asking a third party to potentially give you millions of dollars in exchange for the future cash flow that is not guaranteed. They are going to be very careful and do whatever they can to lower the price or negotiate terms in their favor.
The important point we want to convey in this short article is that while the market ultimately determines the selling price of any business, there is a lot that a vendor and his or her advisors can do to positively influence the outcome.
 Earnings before interest, taxes, depreciation or amortization