Value is ultimately determined by a willing buyer and a willing seller agreeing to a mutually satisfactory price with neither buyer nor seller under any compulsion to deal.
ACS can help you identify the key factors and data that will affect the valuation of your business enterprise. ACS principals have extensive experience in business valuations and have testified as an Expert Witness on valuation in legal matters.
Investment bankers rely on 4 primary methods to evaluate a business:
Comparable public company valuations
Comparable M&A transaction valuation
Discounted cash-flow analysis of expected future results
Detailed financial analysis of the assets and liabilities of the business
Valuation is representative of the financial condition of a business at a fixed point in time, measured against current market conditions and investor expectations. When sailing towards a distant shore, conditions change, squalls blow up quickly, we can all hope for fair winds and following seas. Sailors need to have insight into all the factors that affect the voyage, not just the moment in time.
The valuation of a business is ultimately determined by its earning capacity. Earning capacity is the money available to the owners or shareholders after paying all the operating expenses and taxes of the business. Value is related to risk. We look at historical results, current performance and future earnings potential. The risk inherent in operating the business must be evaluated against the uncertainty of future events. ACS can establish a value for an independent business, a process which typically takes 60-90 days. A certified valuation report will cost $50,000, uncertified reports or opinions can cost less.
If you are looking to retire, your business may have a premium value to a strategic buyer. The way to unlock this value is to sell your business. But personal considerations that matter to you may affect value.
Premium Value to a Strategic Buyer
A company may command a premium value to a strategic buyer for reasons totally unrelated to the value of the business as an independent entity. A seller can obtain a premium value for a business by selling to a strategic buyer with specific needs. These needs include:
Unique Intellectual Property: You may have proprietary Intellectual Property that can be more effectively exploited for profit by a new owner. A single patent can be worth more to a large multi-national corporation than to a small business enterprise. An example of this is a regional chain of 52 retail pasta shops that had a patent on special packaging that kept the pasta fresh for weeks. A major multinational food company bought the business for $52 million and immediately closed the shops: they were not interested in retail shops, they were after the patent and had plans to sell fresh pasta globally.
Competition: Eliminating a competitive threat to give a company better pricing control or to “catch and kill” a business which could grow into a major competitive threat. An example of this is the acquisition of Newport Medical Instruments by Covidien. Newport was a medical device manufacturer with a US Government contract to manufacture inexpensive ventilator systems. While Covidien wanted other products made by Newport, having inexpensive competitive products on the market threatened some of Covidien’s more profitable products helping to justify a $108 million premium price.
Geographic Expansion: Establishing new geographic territory for a buyer’s existing products by exploiting the sales and distribution channels of the seller. In the 1960s and 1970s many copier companies were established around the world as Xerox’s patents expired. Copiers require maintenance and support. During the 1970s and1980s the global copier industry consolidated with larger companies buying small regional competitors to acquire their sales and service networks.
Large multi-national companies may not be interested in operating your business in its current location. This type of deal is cynically called a “close and move.” If you are a successful entrepreneur or family-owned business and have built a world-class company in a relatively remote location, think twice. You might not want to become a pariah in your community for selling the business and harming the local economy. As experienced negotiators we obtained legally binding promises from strategic buyers to maintain business where they are. This can work for several years, but nothing is forever. Or you can accept that “money isn’t everything” and sell to someone in your community who you trust or structure a management buy-out. We can help.