“Five simple words,” he said.
It’s common in our line of work to sit with business owners looking to sell their companies. Almost always, those owners are concerned with one number. In this instance, it was no different. As we walked through the timeline for the next six to nine months should he decide to sell his business, he reiterated: “Five simple words. How. Much. Can. I. Get?”
When someone asks that question, he or she expects a simple, singular number. However, the answer to that question proves to be much more nuanced. To examine what your business is worth, you must understand how value is derived.
If you are a business owner, chances are that someone, at some point in time, has looked at your business and told you how much it is worth. They likely used a combination of academic approaches – discounted cash flow, comparable analysis, etc. — to arrive at a fair market value.
This fair market value, or FMV, is a simple way of saying “hypothetical value” and assumes that (i) the hypothetical transaction is arms-length, (ii) the seller is not pressured to sell, and (iii) there is no hidden information. While a useful proxy, FMV does not represent the realities of a marketplace transaction.When a buyer buys a business, that buyer is buying the expected future cash flows of that business. Some buyers believe they can increase expected future cash flows of the business by increasing revenue or decreasing expenses through operational enhancements or synergies – a word which, in the financial sphere, means cost cutting. Some buyers see your business as value-accretive to their own business through product or geographic differentiation. Some buyers want to own and operate your business. There is a range of buyer types which value expected cash flows differently.
The truth is that your business does not have one value. Your business has a spectrum of values depending on terms, macro-economic factors, and respective buyers. When good investment bankers provide you with the value of your business, they are showing you an expected range of possibilities given the current and expected market pricing. There are five key value drivers when it comes to selling your business:
1. Competitive process
2. Buyer-friendly terms
5. Market forces
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Steve Niehaus, MBA, CBI, CM&AP