Don’t Overlook the Value of a Business
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A seller contacts a broker and visions of a lucrative relationship form. However, the reality of the financial data falls far short of expectations. It appears as if the business has very little value. A familiar scenario in the brokerage community, the question becomes what to do next?
We recently marketed and sold this business using BizQuest. In the process we were able to get a price that was many multiples higher than suggested by standard valuation methodology and rules of thumb. The key to this transaction was to understand who would be the most likely buyer, and what value they would place on the business.
Standard valuation methodology and rules of thumb rely on the assumption that a new owner will operate the business substantially the same as the previous owner; a new owner’s expenses will be the same or similar. This is why businesses are priced based on multiples of the seller’s discretionary earnings. Buyers generally won’t pay for potential, but they will pay for real earnings. The central question then becomes, “how do you show earnings a seller isn’t realizing?”
The answer is, “identify your buyer.” After conducting industry research we determined that there was active consolidation going on for this type of business; competitors were buying competitors. In this scenario the competitor is acquiring customers and some infrastructure, but not all of the operating expenses. Part of the value of the business for the competitor is the ability of the buyer to “leverage” their current operating expenses. This isn’t buying “potential,” this is value a buyer will receive the day they get the keys to the establishment.
Based on this knowledge we re-ran our valuation process. It yielded a value significantly higher than the traditional method. Based on this information we went to market on BizQuest and immediately attracted three interested competitors; one of which purchased the business for many multiples of the seller’s discretionary earnings based on the traditional methodology.
How did we know to depart from the standard valuation routine? Fortunately our firm believes in continuously improving or knowledge of the industry and using the most effective methods to bring value to our clients. We advance our professional development through our active participation in the International Business Brokers Association (IBBA). By routinely attending conferences and taking advantage of educational opportunities, we come away with valuable information in which to serve our clients. This particular valuation concept came out of an M&A workshop given at the Reno conference.
The lesson this in this story is to keep current on the industry; don’t get lulled by routine, and exploit the effectiveness of your tools. We owe it to our clients not to overlook the true value of their business.
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| Jeffrey Paquet is Certified Business Intermediary (CBI) with CenterPoint Business Advisors. This Littleton, NH firm specializes in providing consulting, valuation, and brokerage services to owners of small and medium sized businesses. CenterPoint provides services in multiple vertical markets, and over a broad geography. Jeffrey Paquet recommends that business brokers become members of the IBBA and market businesses through BizQuest. |