Generational Equity Experts Tell How to Find Hidden Value in Your Business

By Generational Equity

09/13/2016

We have heard the term EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). Many people believe that a multiple of this figure is the best way to determine the value of a business. Although this is certainly one method of business valuation, in order to obtain the optimal value for your business, it is wise to use a variety of valuation methods.

“The old Latin saying from the first Century, B.C. still holds true today,” said Terry Mackin, Managing Director Mergers & Acquisitions with Generational Equity. “Everything is worth what its purchaser will pay for it.”

“Understanding what the potential buyer values is one key to obtaining the best price for a business. A spreadsheet often doesn’t tell the whole story,” said Carl Doerksen, Director, Corporate Development with Generational Equity, a firm that specializes in helping business owners release the wealth of their business by providing merger, acquisition and strategic growth advisory services.

“There are numerous reasons that one potential buyer is willing to pay significantly more for a business than another,” said Mackin.

“Identifying the underlying value of a business (often termed the off-balance sheet assets) is a key part of the pre-sale offering process that is often overlooked.”

Here are some examples of hidden value (a.k.a. intangible assets):

• Long-term favorable real estate leases or ownership – Sears is a good example of a firm that is struggling as a department store, but has extensive valuable real estate holdings.
• Recurring revenue – long-term service contracts, vs. one-time deals, can add significant value to a business.
• Strong customer relationships – the ability to maintain strong customer relationships by keeping key employees under contract or the owner involved can add significant deal value.
• Overcoming high barriers to entry – an established business may already meet stiff regulatory requirements or may have already worked hard to obtain zoning that could cost a startup or new entrant time and significant expense.
• Equipment that is already amortized – buying an existing factory may be a much better value than trying to start one from scratch especially if it requires new and expensive specialized equipment.
• Key employees – the ability to immediately leverage key employees can be especially valuable in instances where skilled employees are in short supply or would take time and expensive to recruit and train.

“It takes specific expertise to identify and evaluate these assets and their value to different potential buyers,” said Doerksen.

“Failure to take these steps and to cast a wide net to find buyers who will see this value can leave significant money on the table when selling a business or can lead to less favorable terms for the seller.

“For example, some buyers are willing to pay for an owners’ involvement and for the technical expertise and customer relations that can help generate a continuing positive revenue stream after the sale.”