Getting The Highest Price For A Business
Novmeber 2005
Business owners frequently lose sight of the reality that
at some point the business they own will be sold; either
voluntarily or involuntarily. The business will either be
sold by the owner, or the owner’s estate. The key
question then becomes what will determine the value that
is paid for the business.
Determining the value of a business can be summed up in
three basic concepts; transparency, growth, and strength.
Each of these elements adds to the value of the business
is its own unique way. They are a three legged stool…
each leg needs to be present and in balance to make someone
want to buy it for top dollar.
Most business owners assume that the value of their business
is obvious. The reality is that it is not so obvious to
the buyers. Buyers start by looking at the company’s
financial statements to develop a picture of the worth of
the business. They generally look back at least three years
(and frequently five years) to see how the company has preformed.
Frequently, the only financial statements available to the
buyer are the tax returns. Tax returns are the poorest documents
for getting the buyer see the value in the business for
two reasons. First, on a tax return the objective is to
minimize the tax, so the net income in minimized. This means
there is less income for the potential buyer to consider…
less income, a lower price. Second, the format and rules
for filing (exclusions, exceptions, etc.) various items
on the tax return do not lend themselves to an easy understanding
of the operations of the business. To get the highest value,
a business owner should retain an outside accountant to
prepare the company’s financial history in standard
accounting format. Then present this to the buyer for their
review. The bottom line is that if a buyer can not see the
value in the numbers, they are not going to pay for it.
Businesses that command the highest prices are those that
are growing and are perceived as being able to continue
to grow. Buyers are looking for a track record of
growth and an understanding that the growth can be sustained
without the existing ownership. Additionally, the buyer
needs assurance that the markets being serviced by the company
will continue to grow, or at least are not about to collapse.
The perception of sustainable growth gives the buyers confidence
that they will not have to address a major revenue crisis
after acquiring the business and that they will make more
than the current ownership.
The financial strength of the business strongly influences
what the buyer will ultimately pay for the business. A profit
and loss statement that shows consistent (and growing) profits
gets their attention. The P&L should tell the story
of how the company is run. Businesses with an above average
gross profits command a premium. A balance sheet that shows
borrowing capacity. The balance sheet needs to show there
are more assets than liabilities… basically that
there is real equity in the business. This is particularly
advantageous to the seller as it creates the opportunity
for the buyer to pay more cash at closing by borrowing from
the bank based on the strength of the business. The key
financial statement in the buyer’s decision process
will be the sources and uses of funds statement. This will
show the buyer if the business will be able to pay a regular
cash dividend to the buyer… if it can, the price
will be higher. All of these financial statements should
be readily available in standard accounting format and the
seller should be able to explain these statements in detail
as to what has happened to the business over time.
Most business owners look at a business only as a means
to generate income. A few business owners look at business
as a way to generate income as well as create wealth. The
differences in the management of the business can have significant
impact on the price and terms ultimately paid for the business.
By managing the company so that it is an attractive investment
for potential buyers is the critical to achieving both income
and wealth.
Submitted by Edward A. Calt, owner of Business Appraisal
Services in Raleigh. His number is 919.844.2680.
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