First – lets talk about the different kinds of value – can anyone think of a few?
Liquidation ValueThe estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business.Usually pennies on the dollar – Goodwill Value represents the value of a company over and above its liquidation value.
Replacement ValueThe amount that an entity would have to pay, at the present time, to replace the assets of the business.Antique Roadshow – insurance value
Investment ValueThe estimated value of an investment to a particular individual or institutional investor. It may be greater or less than Market Value depending on the investor's particular situation.Usually, relative to synergiesReturn on Investment – risk verses reward - liquidity
Fair Market ValueThe amount at which a business or property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts. – this is a fairy tale much like the unicorn – in the real world there all always pressures and constraints on one party or another
Going-Concern ValueThe value of a company as an ongoing entity. Unlike liquidation value, the ability of the company to continue to earn profit is considered.Most Probable Selling Price This value is comprised of the value of its tangible assets plus intangible assets (goodwill)Now that we have discussed types of value let’s talk about value itself.
Value is measured differently by each buyer or owner40% of the business sales that fail fail due to a difference in price and value between the buyer and the sellerStructure of the deal can affects valueWhat is my business worth – everyone’s favorite questionThe obvious answer is that it is only worth what someone is willing to pay for itIt will also be worth different amounts to different individuals or companiesTherefore – in order to set a price you need to calculate the estimated value for your most likely buyer
Factors that differentiate an 6x+ multiple business from a 3x (an “A” business from a “C” business)These are characteristics that either reduce the risk associated with owning the business or enhance the prospects that the business will grow significantly in the future. Every business would want these Value Drivers to be in place as you exit the business to ensure that the business can continue and that you will receive the income stream you need to reach your financial objectives.ASK: Who can name a few? Recent profit history General condition/characteristics of Co. Market demand for particular type of biz Economic conditions Ability to transfer goodwill / other intangible values to a new owner
FINAL THOUGHTS ON VALUE DRIVERS: These Value Drivers are not dreamed up by a business school professor but are what professional, sophisticated buyers seek in closely-held businesses. Need to work on enhancing these Values before the sales process begins will help you get top dollar. Also create a tax-efficient business structure before the sale begins
Most of those value drivers are intangible factors which make up part of the value of a business:GoodwillSome people argue that there is no value to goodwill and that you can’t sell goodwill – here’s a whole store of it!In business, your intellectual capital is measured by your goodwillGoodwill = (fair market value - tangible assets)Personal goodwillIndividual goodwillBusiness goodwill
To reduce risk and grow value… Business continuityTransform personal (and individual) goodwill into business goodwillMaximize business goodwill valueExternal factorsInternal factors
External factors Changes in worldwide/regional/local economiesTechnological changesGovernmental and regulatory changes
Internal Factors Employees and other stakeholdersExisting business systems and processesleadership, management, marketing, finance, operations, sales
How much growth is possible?In many cases… goodwill value can be systematically doubled or even tripled in 3 years or less
Increasing value should be the business owner’s number one goal.
A business that can be sold for more money
A business that can be sold more easily
A business that can survive a management buyout
A business that can survive a family succession
A business with greater growth potential
A business that can capitalize on a recession
A business that is not operationally dependent on its owner