Casual opinions of what a business is worth are as abundant as sparrows. Those opining rarely have knowledge of the particulars of the business, the deal terms, an understanding of the sector or any transaction expertise. All are imperative to formulating a competent view on value. Sellers often reach out to valuation specialists for a fair market value opinion, but these regimented, theoretical valuations - while an improvement on sparrows - are better suited to litigation, divorce, or estate planning.
Owners should seek professional help prior to selling a business or planning an eventual exit. As my IBG Denver colleague
John Zayac
recently explained regarding the complexities sellers face, “Price is often a starting point in the discussion, a common marker for value. However, it is only the tip of the iceberg. Price is predicated on a complex foundation of components including shifting responsibilities for risk, tax treatment and intangible values, all of which may move dramatically as a sale is negotiated.”
To the question, “What is my business really worth?” IBG Pennsylvania managing partner
Gary Papay
adds an important follow-up question: “And why?"
"Knowing the reasons underlying the value of a business can reveal value-enhancing improvements," Gary notes, "or set up better initial positioning of deal terms.”
The most useful guidance for prospective sellers will combine sophisticated appraisal techniques with recent ‘boots on the ground’ experience on actual transactions. A market-informed opinion of the value of a business will gauge how potential buyers might respond to its sale. The opinion should provide a range of values, articulate what factors underlie the opinion, and comment on possible impacts of different deal structures. Strategies to minimize obstacles and enhance value may be offered.
Seasoned mergers and acquisitions advisers can also expertly evaluate and manage the nuances and practicalities that arise in the “real world.” In any transaction, the buyer and seller have opposing goals: each seeks to best serve their own interests but must ultimately acquiesce in some part to the other while retaining sufficient benefit for themselves. The odds of success in this process dramatically improve when it is proactively managed by a seasoned professional who can keep polarizing realities within a cooperative framework. The parties will also be more likely to work well together post-close.
Market Factors in Increasing Value
Pre-sale valuation work and pro-active management of transactions are key, but subtle dynamics and market factors unique to a deal can also be vital determinants of value.
I recently worked on a deal that perfectly illustrates such market dynamics. The client’s firm, a niche food manufacturer, initially might have had a competent fair market value of around $20 million. IBG perceived growing demand in the industry vertical, and thought an opportunity existed with the evolving market dynamics. They advised the client to decline early offers and to continue to build value in the business. Improve it did, but IBG’s “read” on the market and recommendation on timing made a tremendous impact for the client: a buyer seeking market control and expansion in the vertical ultimately out-bid several competitors to buy the company for the cash price of $120 million. While such extreme opportunities are uncommon, the “savvy” of a seasoned dealmaker can radically impact what is already one of the biggest financial events in the lifetime of a business owner.
Business owners must understand optimal timing and valuation complexities prior to any sale. Today, demand remains robust for quality middle market businesses and valuations are still excellent, but a cooling in the market is anticipated. Active mergers and acquisition broker and advisory firms prepared to assess opportunities with a “real-time” read on the transaction market remain the most vital resource for owners seeking to sell for top value.
IBG Business exists to bring merger and acquisitions skills, resources and knowledge to middle market business owners selling (or buying) businesses.
