Most people don't.  Those who think they do, are often misinformed. The valuation of a business varies greatly depending on the purpose of the valuation; the methodologies utilized; timing of the valuation; and by who is performing the valuation. If you don't know how your business is valued today and would be valued by third parties in the future, you won't know what strategies will be best to increase the value of your company between now and when you want to exit on your own terms.


How Much is my Business Worth?

The most misleading question an owner asks is "what's my multiple?" This is not because multiples aren't important – they are. But more important, when seeking the best offer from buyers, is "what number will each buyer be applying a multiple to?" Various academic exercises, using all sorts of techniques and information from databases, etc., can estimate the range of value for a business on a spreadsheet. But the true value of your company is only determined when you receive multiple offers from the most likely buyers who are most interested in your business. Each buyer usually has a multiple of cash flow in mind, but the cash flow they apply that multiple to can vary widely for different buyers. Even when buyers use similar multiples, one can outbid a second by a large margin if they have savings and synergies the other buyer doesn't. While no buyer wants to pay more than they have to, some buyers stand to gain more from acquiring your business than others – and competition will result in paying some of that difference to you, so they are the likely buyer that you would select.  Therefore, you must identify the value drivers important to each potential buyer. One of the most important things you can do is to work with an advisor who 1) can help identify the savings and synergies applicable to each buyer you approach, and 2) will be most effective in communicating these opportunities at a senior level to each buyer.

There are many ways to get liquidity out of the company you've worked hard to build over many years.  Dividend recaps, ESOPs, management buyouts, leveraged recapitalizations, minority stake sales, a sale to a strategic corporate buyer – they're all very different types of transactions, with different structures, valuations, and outcomes for you and your company's stakeholders.  Your ability to do some of these will depend directly on how well prepared you are and how well-suited your business is positioned to execute that type of transaction. You need to be thinking about what type of transaction will be best for you and your company many years in advance – otherwise it is highly likely that some of these options will not be possible for you or won't be able to accomplish your goals when the time comes.

Most business owners who have not thought about a possible transaction well in advance are often surprised that their options seem so limited when they do eventually consider a liquidity event. If the type of deal you might prefer requires use of significant bank debt, and you already have maximized the amount of debt on your business, many times there is very little liquidity available for shareholders in these types of structures (recaps, ESOPs, etc.).  Also, your company will need to continue to perform without you and anyone else on your team looking to step away – otherwise its value will be diminished due to the risk faced by a potential buyer in the transition. You need to know what needs to be done far in advance so you can maximize your options when the time is right for a transaction. You've worked hard to build your business – it's critical to take the time to understand the things that will allow you to access that value the way you choose when the time comes.

One of the best reasons to always be thinking about who the buyers of your business might be, regardless of whether a sale is something you ever expect to consider, is that what matters to those buyers will help you understand what factors drive the value of your business from an outsider's perspective. There are some obvious ways to create value in your business – growing revenue, improving margins, increasing cash flow. But there are also some nuanced value-drivers that can be just as important – things like hitting various levels of critical mass in revenue or EBITDA, detailed and flexible financial reporting systems, developing a deep and aligned management team, etc. Doing the things that make your business attractive to the broadest possible range of buyers is always a good thing, providing you the most options down the road regardless of how you ultimately decide to transfer away from your company someday.

Owners often think they know who the buyer of their business will be someday – in our experience the buyer is almost never who the owner suspects.  There are a range of reasons for this, but the most common is that you simply never know what every potential buyer is or will be thinking when you run a competitive process. It may be a competitor in your industry; it may be a company highly interested in expanding into your industry; or it may be a company who needs to acquire your business to prevent another competitor from doing so.  The sooner you start to think about and keep track of who all the likely buyers are – regardless of whether you ultimately want or don't want to contact some of them in a process – the easier it will be to present the savings and synergies each might bring to the table in a combination with your company. In a confidential competitive process, none of the potential buyers know who else you may be including in your sale process.  So, you will want them all to assume they are competing with all others, some of whom may have greater synergies.

Attracting more qualified buyers for your business results in receiving more qualified bids.  The more bids you receive, the better the price and terms you will get. You shouldn't care about the average offer, you only care about the outliers on the upside who present the best deals for you to consider. And the upside outliers from a group of 10 bids will be better than a group of 3 bids. So, expanding the audience of qualified potential buyers is important to achieving your best outcome. You will need to consider the obvious and less-obvious buyers for your business, domestic and international, as well as the private equity firms who have an investment focus in your industry (or already own a portfolio company that may be complementary to your business). Build out the widest possible list with your advisor, then prune it down to those who have the resources to do a transaction and make the most sense to you.

Many people incorrectly assume that there is a valuation multiple that applies to businesses in their industry sector, and that such a multiple would then apply to their company. In the lower end of the middle market (companies valued between $20 million - $250 million) there are several other factors that have greater impact on the actual multiple an owner ultimately achieves in a sale. The most influential factor on the valuation multiple you can achieve is directly related to the number of qualified and interested buyers who compete for your company. That said, there are things that may disqualify your business from being considered an acquisition candidate by large numbers of corporate and private equity buyers – thereby reducing the audience. The most important disqualifying factor can be the overall magnitude of your EBITDA, and whether it reaches certain minimum levels which will expand the audience. There are many great businesses that simply do not meet the minimum size criteria for buyers of a certain size, and most of those buyers are also the ones with the best ability to monetize savings and synergies by combining your business to theirs. So, businesses with $3 million in EBITDA generally achieve lower multiples than similar businesses at $5 million in EBITDA, which achieve lower multiples than those at $10 million in EBITDA and greater. Critical mass (i.e., the dollar level of EBITDA) is an important measurement of potential risk to a buyer – the smaller the business the higher the risk, the higher the risk, the lower the multiple. And, importantly, lower levels of EBITDA are also unable to be financed as readily by inexpensive bank debt – directly impacting how much a buyer can afford to pay for an acquisition.

Many businesses can be operated for years with basic accounting software and without a sophisticated management reporting system. And many owners run their businesses perfectly well for many years without audited financial statements. But if your objective is to eventually sell your business for a high price and on optimal terms, you will need reports and analytical data that meet the highest standard – annual financial statements prepared by a third-party accounting firm (preferably audited), monthly management reporting packages, detailed budgets, etc. Implementing these processes and systems can seem expensive, but this cost will be minimal compared to the value you will not receive in a sale without them.


Why It’s Never Too Early to Prepare Your Business for Sale

You know your business "like the back of your hand." But a buyer, and the investors, lenders and advisors who support them, don't.  If you want a third-party buyer to pay you an optimal price with optimal terms, you have to be ready to show a buyer everything about your business in the best possible light using terms and reports that are standard in the M&A process. Your business must operate with high quality internal systems and controls and have financial and accounting reports prepared by professionals.

Find out more about the Dunn Rush Gold Standard of Preparation.

Everyone exits their business someday, and it only happens one of two ways: on their own terms or someone else's. The only way to ensure that the business you've worked hard to build will benefit you and your family the way you hope is to prepare far in advance for how you will transition away from your business – planned or unplanned.  Our rule of thumb is to be focused on what you're building toward at least 5 to 7 years before you hope to sell. This may seem very early, but you need to align three things: 1) when you're ready, 2) when your company is ready and 3) when the market is ready. If these things are not aligned, particularly 2) and 3) above, you will not receive optimal value for your company. No one who sells a business successfully wishes they had done less planning.

No matter how far off your transition out of the day-to-day business operations may seem, it is always prudent to have a well-established succession plan in place.  It can certainly evolve over time, but at any given time you may want or be compelled to consider a transaction or financing, and you will need the assistance and involvement of those who are your most trusted management team members.  To maximize the value of your business, you need to make yourself expendable – in many cases the value of your business is not transferrable – or only at a sub-optimal price or terms – if everything runs through you.

Audited financial statements can be expensive, and many companies are sold without audited financial statements. But if your objective is to obtain the best price and terms possible, they can be a critical tool that allows larger corporate or institutional buyers to bid more aggressively, move more quickly and confidently, and be less likely to find issues in due diligence that modify their offer after due diligence. The larger and well-financed strategic and financial buyers who typically bid most aggressively are required to conduct audits on their own businesses, and in many cases expect that the highest quality acquisition opportunities would also meet the highest standard of financial reporting. Those acquisition targets that do not meet this standard require greater scrutiny and are far more likely to have certain policies and procedures that may not meet the criteria of such a buyer, resulting in a lower value, onerous terms or possibly tepid interest in acquiring the company at all.

Find out more about the Dunn Rush Gold Standard of Preparation.

The use of a Quality of Earnings report or QoE has emerged as a due diligence requirement for buyers over the past decade, and more recently as a potentially critical tool for sellers. A QoE is a financial analysis performed by the transaction services group of well-known accounting firms, and is very different than an audit. In fact, many companies without audited financial statements are choosing to pair reviewed financial statements with a QoE in preparation for a sale process rather than upgrading to an audit. Audits and reviews are purely backward-looking presentation of the as-is actual financial performance of the company. A QoE, however, is a pro forma analysis done in great detail which evaluates any one-time events, unusual items or any other known changes which may impact the performance of the business going forward. For this reason, sellers are increasingly performing a QoE at the beginning of a sale process to identify (and address or rectify if possible) any issues that the buyer would eventually uncover in their own QoE – minimizing the likelihood of surprises in the middle of the process which can reduce the price of a deal, impact the terms, or worst case even prevent a sale from closing.

Find out more about the Dunn Rush Gold Standard of Preparation.

The most favorable price and terms, and the fastest path to closing, happen when the highest quality buyers can quickly and confidently assess the quality and performance of your business. This is done by presenting as much detailed analysis as possible and demonstrating an absolute command of knowing where your business is headed in the immediate future – which is what a buyer is most concerned about if they acquire your company. To convince the audience of potential buyers that your company and management team are of maximum value, you must leave no doubt that you clearly understand the strengths, weaknesses, opportunities and threats faced by your business and that you know why and how the company's financial performance will continue to improve. Providing buyers with detailed management reports and sales forecasts proves to the buyers that you have proactive plans and data management systems in place to provide the critical information they will need to make the best decisions. When buyers are confident your management team is on top of everything within their control, they will bid more aggressively.

Find out more about the Dunn Rush Gold Standard of Preparation.

A Virtual Data Room (VDR) is absolutely essential for a sale process, but also has become a very cost-effective tool for managing your day-to-day business. The cost to organize and securely store corporate organizational and legal documents, contracts, financial reports and a wide range of management reports in a convenient cloud-based environment has declined sharply in recent years. Having any important information and files available to you and authorized members of your management team any time, from any location, can be hugely helpful in managing the growth of your company.  But even more importantly, creating and maintaining an updated VDR gives you complete control over when and how you decide to share information with outside parties with whom you may want to discuss a potential transaction or financing. Anyone who has had to scramble to compile key documents and information will testify to how challenging it is to do so without creating suspicion and anxiety among employees who aren't used to pulling files together for you on an urgent basis. By making the collection and posting of these files a standard part of your month-end closing process, you can completely eliminate the unusual nature of such requests. And whatever you need, whenever you need it, is generally right at your fingertips should circumstances arise where you want to evaluate an opportunity on short notice. Being prepared to move quickly never has a downside – but not having the information you need, when you may need it, can certainly be problematic.

Find out more about the Dunn Rush Gold Standard of Preparation.

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