Here at Transact Capital, we have found that the biggest ‘Deal Killer’ is the initial price expectation between a buyer and a seller. That is why we offer each of our sell-side engagements a thorough valuation prior to going to market to ensure that expectations are properly managed at the start and we have solid ground from which to negotiate when an offer is brought to the table.
There are four main reasons for valuing a business:
- Improve the business’ real or perceived value,
- Determine the most opportune time to buy or sell,
- Negotiate a better price, and/or
- Complete a purchase more quickly.
Leslie Garry, valuation expert at Transact Capital, states, “The probability for a successful sale increases drastically if both the buyer and seller start with realistic expectations.”
In today’s environment, it’s important for business owners to focus on the value of their company and understand what drives it in order to realize the maximum price.
Generally speaking, cash flow drives value. If you want to increase value, you need to increase sustainable cash flow. Notice, we said sustainable cash flow. While it might look good to have a short-term increase, an educated buyer will see through any non-sustainable increases and adjust those in determining the purchase price. Cash flow is typically defined by a buyer as earnings before interest, taxes, depreciation and amortization (“EBITDA”) normalized to account for any excess or non-recurring expenses and annual investments in capital expenditures.
Here are some considerations for determining a normalized cash flow and driving up value for your business:
- Adjust owner(s) compensation to a level that is representative of what the role(s) would command in a competitive, local market. Make sure to take into consideration any associated benefits.
- Eliminate expenses that do not contribute to the value of the business, including human capital. Often times we see situations where a business owner tries to get credit from a buyer on addbacks for unnecessary expenses that they continue to incur but assume a buyer will eliminate on their watch. This rarely works out in the seller’s favor, so go ahead and cut those expenses now to improve cash flow and maximize value.
- Document owner perquisites. Owner “perks” can include cell phone, meals & entertainment, travel, auto, memberships, etc. These expenses can almost always be added back to EBITDA, but you’ll want to be sure to keep detailed records and receipts that track to the expenses on the income statement in order for them to pass muster during due diligence.
- Clean Up Working Capital Accounts. We could write a book about working capital in deal negotiations, but we won’t get into that now. At a high level, review your aging accounts receivable, inventory, and accounts payable reports and try to clear out anything that is considered past due. If you’re sitting on excess, non-operating cash try and move it off the balance sheet. Often times a buyer will set a target working capital based on actual working capital levels in recent periods so it’s best to operate with the appropriate level of working capital required for your business for a period of time – ideally at least 12 months.
- Review all policies, procedures, processes, contracts and agreements. Although this isn’t directly related to increasing cash flows, a buyer expects to see all of these things in good shape during the due diligence process. We have a saying at Transact – “time kills all deals.” Assembling an organized “offering package” can increase the value of the company and expedite the selling process. Here’s a short list of some items to consider for review:
– Real estate and equipment rental agreements,
– Employment and noncompete agreements,
– Supplier agreements,
– Customer contracts and lists,
– Insurance policies, including company-owned key person life insurance plans,
– Mortgages, lines of credit and other financing agreements,
– Fixed asset listing,
– Technology inventory and licenses,
– Brochures, catalogs, websites and other marketing programs,
– Job descriptions,
– Formal policies and procedures manual, and
– Organizational charts.
There are many other things that can be done to help increase the value of a business. This article outlines some of the lower hanging fruit.
Contact Steve Zacharias at (804) 612-7102 for assistance in getting your business ready for sale. Transact Capital may have some creative ideas and services that relate specifically to your business.