Value...what's my business worth?

March 25, 2011 


I met with a client yesterday whom I have truly enjoyed getting to know.  Over the last twenty years, he and his wife have built a geographically exclusive business that has done quite well.  I am looking forward to assisting them in the sale of their business.  Yesterday we reviewed their company's valuation memorandum.  It was a great discussion.  As a consultant, the best part for me was when the lightbulb of understanding lit up...it was like that yesterday.


Determining any firm's value is two parts science and one part whiffle dust.  Let me explain.


The science part is in the business's history...revenue, income, assets, and liabilities.  That financial score keeping stuff.  It is straight forward, if you have access to the relevant databases, to search out 'similar' companies that have sold in the recent past.  Generally those companies have published financial metrics that allow revenue and earnings to be converted to ratios.  Transaction value to revenue, and transaction value to adjusted earnings.  That is good and relevant information that can be applied to the subject company to determine a historical market value basis. 


Then, there are similar companies currently listed for sale.  The issue with the current companies for sale is, that they have not sold yet...they are not part of history.  However they are the competition for potential investment dollars.  All else being equal, one would expect that a company with a lower offering price would sell before one with a higher market price.  It's part of the information that determines value because it influences what a willing buyer will need to offer to acquire a company.


The company's history also gives an indication of future performance; but only an indication.  The company exists within an industry segment that has historical performance attributes.  With research, it can be determined if the company has historically outperformed or underperformed compared to its industry.  Industry research also provides a future expectation about its performance, competitive environment, and expected growth.  Mashing all of that together creates a decent expectation about the company's future cash flow...again, all else being equal.  Using a calculated discount factor(the cost of money = interest or investment return), those future cash flows can be converted into a dollar value for today...present value.  J. Wellington Wimpy's famous quote...'I will gladly pay you Tuesday for a hamburger today,' is certainly appropriate.


If the company has assets: equipment, inventory, accounts receivable, real estate, or intellectual property those create value...and in this time and place, real value.  The buyer can finance his transaction by borrowing against these assets.  Typically, this valuation is referred to as 'book value'.  A high book value typically occurs in industries with a high cost of entry; manufacturing, pharmaceutical, complex computer software applications, transportation and the like.  Low book value companies; service companies, consulting firms, accounting firms...M&A advisories...can still be valuable; but may create challenges for the buyer in that financing may be more difficult to obtain.


Now the whiffle dust...in the range of historical multiples where does the company fall?  How come?  Same when compared with the similar companies currently listed for sale.  Is it a publicly traded company?  How does the size of the company compare with those in the comparable populations?  Larger companies typically have higher multiples.  What is the premium for selling a control position vs. a minority position?  Is the owner the heart and soul of the company or has he wisely created a management layer beneath him, so that his exit is an orderly transition rather than a catastrophe?  What about the life of existing contracts or patents?   An easy versus a tight money policy at the federal banking level, the availability of financial capital to fund a buyer's purchase can dramatically impact sale value - or if a sale can occur at all.  What about the firms proximity to a significant event - like its graduation from the SBA's 8(a) program for small businesses? (Which by the way is an excellent program if your firm does business with the federal government.)  The appropriate application of the valuation whiffle dust is, in fact, a science.  Given the standards with which these considerations are applied makes the valuation process an objective one.


As a business owner, it will be helpful for you to be aware of your company's external value influencers because it is a certainty that the buyer has his own ideas about how that math ought to work.  For what it's worth, the nickels spent having a professional value your business is worth that hamburger - tomorrow.

What's next?

March 16, 2011

An unusual question, especially since the task at hand is an exit rather than an entrance...but the answer can be incredibly motivating and laser focusing.

Business owners seldom create personal space while in mortal combat with the forces conspiring against them to erode profits and market share.  A business can be all consuming; especially so if you love what you do and with whom you do it.   Your employees are family (often literally), your customers are friends, and there is a whole bunch of you wrapped up in your letterhead.  Face it...it's fun, at least some of the time.

But, as you have concluded, it's also time to at least consider the possibility that selling your business may make a lot of sense.  Many questions will need an answer, most are details for tomorrow, a part of the process; but the most important to be answered first is, 'what is next for you'.

For me, when I exited my business, focusing on what was next kept me looking forward rather than over my shoulder.  I was not old enough to retire, would not be independently wealthy, but I knew it was time to do something else.  I divided the future into two periods; the immediate, and the long term.  The immediate was one week of vacation, some time with my girls, two summer mission trips with my church, some attention to foregone home projects, building an heirloom doll house, and some quiet solitary attention on what was important to me for the remainder of my career.  That was my post exit strategy, and for me, it worked and kept me focused through the exit process.  The exit minutiae will not rise to the level of calamity if there is a clear picture of the destination.  Those that know me well know my credo is 'Onward'.  I borrowed that from my business partner, and I'll give it back to him someday.

‘What’s next for you?’ is the first question that I ask when someone engages me as an intermediary in their exit.  If a blank stare follows, there is work to be done and I wind up asking many more questions.  Usually these exit desires are based on escalated frustration with current circumstances more so than the execution of a well thought out exit strategy.  For me, it’s a yellow flag of caution.  An owner selling his business is emotional…but the decision to exit is best made unemotionally.  A solid strategy realized through a well thought out process, emboldened by a well conceived destination…now, that is when it gets fun; that is the genesis of a successful, owner initiated exit.

The experience bookshelf.

March 9, 2011

I am relatively new to the advisory side of the M&A business.  I have worked for a small, boutique, investment bank located in the capital of the Confederacy for the past eighteen months or so. 

With process centric thinking (give me seven local destinations and I can get us out and back with all right hand turns), enough tech savvy and having just sold a company; I believed that the M&A community needed a guy like me.  To believe that my reception would be similar to an Ivy League credentialed, top ten b-schooled, investment bank experienced, blue blooded Virginian may have been a bit naïve…but let me get back to you on that.

You may be aware that the economy’s effect, particularly on small business lending, for all of the last two years and most of the last three, mimics the Skipper’s ‘three hour tour’ with a similar uncharted destination.  Did I mention that I focus on M&A advisory to small business?  It’s been a turbulent career change since I sold my interests in a technology consultancy, about three years ago.  See the thread here?


It’s said that experience is what you get about five seconds after you really need it.  I am the poster child.  That sort of experience, while painfully won, goes on the shelf to build the experience library, never to be given back.  My Dewey Decimal system is well exercised.

I read Dominic Mazzone’s article this morning about the five consistent mistakes owners and their advisors make once the decision to exit is made.  I don’t know Dom, but his article is ‘spot on’ as my British colleagues are fond of saying.  You see, in eighteen months, I have the five mistakes from his article, all on the shelf, in the experience section, non-fiction; sentinels for the future.

The business exiting process is not all right turns.  It is however a process to be managed.  In my consulting business, every single time that I walked into a new facility, the plant manager, VP, and/or President; would shake my hand and without fail say…’I think that you’ll find that we do things differently here.’  Every time, I’d smile and say, ‘Yep, that’s what they all say.’

I don’t have my expert M&A credentials yet, but I do have a few shelves full of experience from the thirty or so opportunities and deals which came ashore on my desk in the last eighteen months.  I’ll do my best to make the reading light, the content relevant, and maybe we will both be better for the journey.