| I am often asked by clients for assistance in | | | | elements related to the purchase of a business. |
| validating the price they are going to pay to purchase | | | | The most commonly used valuation of a business is |
| a small / medium enterprise. Business people should | | | | know as ' value of future earnings '.. Accountants and |
| of course rely on their trusted advisors for | | | | financial advisors often project earnings out as far as |
| professional help in that area, but this article will | | | | ten years and try and then place some value and |
| hopefully give them insight and advice into their | | | | normalcy around those future profits. Our on piece of |
| challenge. | | | | advice in this area is simply that owners should not |
| We also encourage our clients to talk to either their | | | | focus solely on future earnings potential, there are |
| own peers, or in some cases our clients with respect | | | | other factors to be taken into consideration. |
| to others experience in this area. This may help | | | | Some of those other factors of course include the |
| alleviate some of the concern around those business | | | | true value of the current business assets, such as |
| people who are ' non - financial ' in background and | | | | equipment, real estate, fixtures and leaseholds, etc. |
| somewhat overwhelmed by discussion of terms such | | | | We can only say that as critical as those assets are |
| as EBITDA, intangible assets, capitalization and | | | | they must be supported by the company's ability to |
| discount rates, etc! | | | | generate the cash flow to support those assets and |
| We would point out that as technically overwhelming | | | | grow the business. Buyers and sellers frequently |
| as some of those issues might be, there is even a | | | | disagree on the total purchase price, with all sorts of |
| whole additional layer of complexity around longer | | | | psychology kicking in around prices being set |
| term issues down the road. These would include: | | | | artificially high for negotiations purposes, the buyers |
| - Owner and management compensation | | | | focus on a low- ball offer, etc. We would also point |
| - insurance planning | | | | out the buy/sell challenge is accentuated when it |
| - estate planning | | | | relates to a ' service' firm as opposed to a product |
| - exist strategy | | | | firm. |
| With reference to our last point on ' exit strategy ' | | | | Many experts agree that ultimately the valuation of |
| imagine the look on some purchasors faces when | | | | the business was so far out of whack that this |
| they have not even completed the deal and are | | | | clouded any possible attempts to negotiate a fair |
| encourage to talk about an ' exit strategy '! | | | | price for buyer and seller. |
| At the heart of the matter around the final price paid | | | | In summary, buying or selling a small to medium |
| for a business is the concept that both parties feel | | | | enterprise has its challenges. If owners are aware of |
| they have reached a fair deal. As we all know the | | | | the key basics around the technical aspects of the |
| buyers and sellers perception of the same deal might | | | | matter they can successfully utilize third party |
| vary greatly. Ultimately all the technical jargon around | | | | assistance ( accountant, lawyer, trusted financial |
| buying a business comes down to a term such as | | | | advisor ) to consummate a successful transaction. |
| 'reasonable market value'. As common sense as this | | | | Buyers and sellers must focus on tangible issues as |
| may sound it also has its challenges since is it only a | | | | well as all the intangibles that come into play in order |
| hypothetical value based on all the difference financial | | | | to assist in a proper, ( and a successful ) buy or sell. |