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.
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:
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.
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 In addition, they tend to become outdated in a rapidly changing M&A marketplace.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 noncompete 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.
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. Contact us for more information.
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