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A Practical Guide to Business Valuation: Navigating the Sale of Your Company

Being a business owner is akin to owning a boat: the two happiest days are when you purchase it and when you sell it! This guide provides essential insights into evaluating your business and understanding potential buyers. Explore critical questions such as whether you're ready to sell, what your company is worth, and how to enhance its value for potential buyers. We delve into the complexities of the valuation process, the importance of timing, managing risks, and strategies for maximizing your business's sale price.

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A Practical Guide to Business Valuation: Navigating the Sale of Your Company

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  1. NOT Yet A Practical Guide to Valuation

  2. Being a business owner is like owning a boat…. The two happiest days are the day you buy it and the day you sell it!

  3. Agenda • Should I sell? • Types of Buyers and Risks • Valuing your company • Prettying up for the dance • The other option

  4. Capital Markets • Unprecedented Capital Markets • Everyone is buying everyone else • Where do you fit in?

  5. Should I Sell? • Only you know this answer • Things to consider: • Am I ready? • Why am I selling? • What is my company worth?

  6. Am I Ready…NOT YET How ‘Bout Me? NO THANKS! Please, Please Big OFFER!

  7. Five Years Later……

  8. Now I’m Ready Perfect timing is Seldom Perfect

  9. Why am I Selling • Maximizing your company’s value? • Good timing (industry changes, peak earnings, etc) • Succession Planning? • Just want out? • Other business interest? • Other outside interest?

  10. Importance of Why • Answers to these questions help determine: • Potential buyers • Acceptable Buyer • Acceptable price • Legacy issues • Future involvement • Who you will sell to • Legacy issues • False start risk

  11. Buyer Profile and Risks

  12. What is my Company Worth? • Valuation is complex and subjective • Appraisals (for selling purposes) are a waste of time • Value is purely a “risk/reward” equation (unless you get lucky)

  13. Risk/Reward • Multiple of earnings (or EBITDA) • Multiple predicts income the buyer expects in return for his investment • Risk adjusted basis • Risk/Price inverse relationship PRICE RISK

  14. Two Scenarios Buyer 1 Buyer 2 Earnings $1.0 mil $1.0 mil Multiple 5 8 Purchase price $5.0 mil $8.0 mil Anticipated Return 20% 12.5% What makes up the risk/return equation? What makes up your company’s risk/return equation?

  15. Buyer is Seeking Return • Capital goes to investments that provides the best risk adjusted return

  16. Buyer’s Options • Buyer has competing options: • T-Bills (no risk) • Internet start up (high risk) • Your company has its own risk profile • Different for every business and industry • Buyers assess risk differently

  17. Known Risks • Buying a closely held company comes with some inherent risks: • No one knows your business like you do • Customer concentration • Lack of Liquidity • Lack of Management • Narrow economic Moat

  18. Risks • Other risks become apparent during negotiations and due diligence • Certain risks are mitigated during negotiations and due diligence • There is always an analysis of risk/reward for the buyer • The key for the seller is to mitigate risks

  19. Risk Comparison • Back to our scenario • Is 20% right (5 times)? • Is 12.5% (8 times) right? • S&P 500 has returned 12.9% over the last 10 years • What is the right number? • Depends on the buyer, the company and the industry

  20. Mitigate Risk • If you are not an S-Corporation (or other flow through entity), elect S-Status immediately. • Ten year waiting period • Ways to mitigate • Talk to your accountant • Consider non-compete agreements with key personnel (talk to your attorney)

  21. Mitigate Risk • Demonstrate sustainable growth • Keep customers a long time; keep blue chip customers longer! • Manage returns and credits • Watch bad debt • Understand and communicate economic moat (what makes you great) • Cultivate and motivate management • Be honest and forthright

  22. All Common Sense? YES! • Buyer does not know you or your business • Credibility • Small stuff adds up • Be prepared • No surprises

  23. Other Stuff • Be prepared • Have answers to questions that may never be asked • Know your weaknesses • Know your walk away point

  24. Some More Other Stuff • Broker or No Broker • Pick broker wisely • Beware of “exclusivity” and length of time • Beware of “upfront” fees • Transaction fees hurt (could be 6 – 8%) • Check references • How many deals currently (trick question) • Time and disruption

  25. Other Option – “Rex-Hide” Model • Perfect Timing • Leadership and vision • Legacy and employees • Risk off the table - cash in your pocket) • Someone else’s risk – keep some upside • Focus on core competencies • Minimal disruption and confidential • No transaction fees

  26. Thank You! Craig Kirsch, Director of Acquisitions Rex-Hide, Inc. PO Box 4726 Tyler, TX 75712 903-593-7387 ckirsch@rex-hideinc.com www.rex-hideinc.com

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