I am often asked by clients for assistance in validating the price they are going to pay to purchase a small / medium enterprise . Business people should of course rely on their trusted advisors for professional help in that area, but this article will hopefully give them insight and advice into their challenge.
We also encourage our clients to talk to either their own peers, or in some cases our clients with respect to others experience in this area . This may help alleviate some of the concern around those business people who are ' non - financial ' in background and somewhat overwhelmed by discussion of terms such as EBITDA, intangible assets, capitalization and discount rates, etc!
We would point out that as technically overwhelming as some of those issues might be, there is even a whole additional layer of complexity around longer term issues down the road . These would include :
- Owner and management compensation
- insurance planning
- estate planning
- exist strategy
With reference to our last point on ' exit strategy ' imagine the look on some purchasors faces when they have not even completed the deal and are encourage to talk about an ' exit strategy '!
At the heart of the matter around the final price paid for a business is the concept that both parties feel they have reached a fair deal . As we all know the buyers and sellers perception of the same deal might vary greatly . Ultimately all the technical jargon around buying a business comes down to a term such as 'reasonable market value'. As common sense as this may sound it also has its challenges since is it only a hypothetical value based on all the difference financial elements related to the purchase of a business .
The most commonly used valuation of a business is know as ' value of future earnings '.. Accountants and financial advisors often project earnings out as far as ten years and try and then place some value and normalcy around those future profits. Our on piece of advice in this area is simply that owners should not focus solely on future earnings potential, there are other factors to be taken into consideration .
Some of those other factors of course include the true value of the current business assets, such as equipment, real estate, fixtures and leaseholds, etc. We can only say that as critical as those assets are they must be supported by the company's ability to generate the cash flow to support those assets and grow the business. Buyers and sellers frequently disagree on the total purchase price, with all sorts of psychology kicking in around prices being set artificially high for negotiations purposes, the buyers focus on a low- ball offer, etc. We would also point out the buy/sell challenge is accentuated when it relates to a ' service' firm as opposed to a product firm .
Many experts agree that ultimately the valuation of the business was so far out of whack that this clouded any possible attempts to negotiate a fair price for buyer and seller .
In summary , buying or selling a small to medium enterprise has its challenges . If owners are aware of the key basics around the technical aspects of the matter they can successfully utilize third party assistance ( accountant, lawyer, trusted financial advisor ) to consummate a successful transaction . Buyers and sellers must focus on tangible issues as well as all the intangibles that come into play in order to assist in a proper, ( and successful ) buy or sell.
| 
Main 
