Once you become a Generational Equity client, the first phase of our proven M&A process is one of the most important: Our professional evaluation of your business. From our perspective, this is vital for a number of reasons:
Many business brokers skip this first step because it can be tedious, time-consuming and requires a team of valuation professionals who are skilled at their jobs. It is far easier to simply take a company to market directly and take the first offer that comes along.
Not at all. Let’s take this one bullet point at a time.
Firstly, recasting is vital. Most business owners legally suppress profits in order to pay as little income tax as possible at the end of the year. Many of you have hired gifted and talented accountants to help you do this, and it is perfectly legal and acceptable to do so. However, because you have been doing this for years, your company’s profitability is, in many cases, radically understated.
Recasting, which is an acceptable GAAP process, allows us to remove expenses not related to the ongoing operation of the company, such as owner perks, salaries of relatives who are not vital, bonuses, travel, excessive rents, etc. By doing so, we establish the TRUE profitability of the company historically and this forms the baseline we use for our five-year pro forma. Many business owners interested in selling their business are completely surprised at the difference recasting can make to the profit picture of their firm. If you skip this step, your financials could be very far off in the offering memorandum you create for buyers.
Secondly, we also use the evaluation to form the basis of the recommendations we eventually make to the business owner regarding how to enhance the value of the business going forward in the M&A process.
Let’s face it, there is no such thing as a “perfect” company. You may have a profitable, growing business but you may have issues that, to some buyers, may be concerns. Our team is extremely skilled in finding those areas and bringing them to your attention. Although, you may not like this part, it is just as vital as recasting.
If your company is not “buyer ready” today, our suggestions and guidance will help you get there. Keep in mind that our commitment to you does not end once our initial business valuation is completed. No, we are going to be by your side for at least five years, providing two no-cost business value updates during that time. This allows you put our value-enhancing strategies to work in your business and see how the value of your company is changing over time. It is a very critical output from our evaluation process!
Finally, our evaluation gives you an understanding of your business value range today so you can decide whether to sell your business immediately, or hold and grow your company for future sale. Now keep in mind that our value is an estimate based on our work and is only a guide to what the value might be.
Ultimately, the value of any business is what a willing and informed buyer will pay for it. Often your intangible assets (those off-balance-sheet items that are impossible to value) will determine if a buyer will pay a premium over our baseline valuation. Every buyer is unique, so some will value certain features of your business higher than other buyers because of the synergies they may see in your intangibles.
The business enterprise value is a starting point from where our deal makers begin and then look for optimal buyers willing to pay a premium for your business. Now, again, just like the value-enhancing suggestions we calculated for your business, you may not like our initial valuation number.
Because far too many business owners have no idea how to accurately assess the value of their companies – they simply are too close and too involved in the daily operations. Since many business owners have never bought (or sold) a company before, they have no idea of the nuances of determining the business enterprise value.
So, your initial reaction to our valuation estimate needs to be tempered, sober and prudent. Again, it is only a starting point in your M&A journey, a baseline number that our deal makers will certainly try to beat. The important thing is that it gives you a number to work with.
Without knowing your BEV, how can you even guess which offers to take when negotiating with buyers? You can’t and that is why so many sellers who don’t hire a professional M&A advisor end up leaving lots of cash on the table at close. And they usually don’t even know it!
The most important point is simply this: Starting your M&A process now will give you time to improve your business valuation so that when you are ready to exit, you can with confidence knowing you did all you could to determine what your company was worth before you sold it.
The first phase in our proven process is vital to start sooner rather than later. I have never heard a business owner lament over starting his/her exit process too soon. I have heard dozens over the years complain about waiting too long though. Don’t be one of those folks – take advantage of one of the strongest seller’s markets in ages.
And no matter what you do with your business, do not skip the most important first phase: The evaluation!
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
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