This is not as straight forward a question as many business owners might believe, nor is it as simply answered as many advisors may claim. Various types of valuation analyses can be undertaken—friendly buy/sell agreements between partners, option grants for key employees, estate planning transfer of shares to trusts, etc.—but none offer an accurate assessment of the market value of your company. In truth, such valuation exercises are all theoretical, and true transaction market value can only be determined when a willing buyer comes to terms with a ready seller.

 

There are substantial differences in possible valuations based on the types of transactions sought by a business owner. A “strategic buyer” of a company, interested in how a company will fit their own business goals, is more likely to offer a competitive price than a “financial buyer,” motivated by cash flow and future exit opportunities. If a company enters into a recapitalization or employee stock ownership plan (ESOP), the valuation could be smaller still, but the owner could exert control and perhaps remain involved in some capacity moving forward. Which type of transaction an owner seeks is determined by their primary goals in selling the company. There is no right, wrong, or better method, only a necessarily defined sense of what the owner seeks to achieve in the sale—money, speed, legacy control, employee security, etc.

 

Ultimately, all valuations boil down to cash flow expectations of the seller. For this reason, from an advisory perspective, the sale of a business will most always benefit by being run as a competitive process. What some business owners don’t recognize, is that depending on the types of potential buyers and reasoning behind their need of your company’s assets, the highest offer in a competitive sale could be as much as double the offer of the lowest bidder. It boils down to who is most able to take advantage of what your company provides them, and the highest value bids are often coming from buyers that a business owner might not expect.  

Too often, the question that business owners are focused on is, “What’s my multiple?” A better question would be, “What’s the number that a buyer will apply my multiple to?”
 

The worth of your company is not driven by the factor that you think it is, but instead by what the buyer expects and needs to get out of your company. The trick to running a successful competitive sales process is in identifying the right buyers who can apply the multiple to a number that’s higher than your stand-alone cash flow. It’s all in the eye of the buyer.  
 

What Dunn Rush & Co. is particularly good at, is seeing into the eye of the buyer and understanding how and why certain potential bidders could/will use your company for strategic purposes. We specialize in setting up and running competitive strategic sales processes, recognizing the synergies, cost savings, and cash flow benefits that your company assets might provide other existing organizations.
 

Because we are a team of ex-CEOs and business owners who have gone through our own company transactions, we are able to communicate the story to buy-side executives in a way that will resonate with them. Having participated in numerous company transactions from both sides of the process, we understand how an M&A deal can fit into the strategic structure of potential buyers to maximize valuation. We do the research, make projections, and identify the synergy element for buyers’ goals to see behind the curtain and drive the number that potential buyers will apply your multiple to.

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