28 Mar Around the Web: A Week in Summary
A recent article from Tennessee Valley Group Report entitled “When to Ignore the Market Value for Your Company” explains why in some cases you may not want to sell your business even if you’re tempted with a good offer from a buyer. It is not uncommon for business owners to receive unsolicited offers for their businesses and if you do receive one, it’s a good idea to consult with a broker or M&A consultant.
Business owners should understand the net present value of their business, which is essentially what the company is worth to the owner right now. It is the value today of the business’ projected cash flows, discounted each year by a rate of interest taking into account the owner’s cost of capital and risk to be in that business.
Market value is what the business is worth to someone else. So if you get an offer for your business at market value, you should also compare it with the net present value of keeping the business and selling in 5 years. It may be worth it to wait rather than to take a tempting offer, or it can help you negotiate a better deal.
A recent article posted on the CBB Blog entitled “Strike While The Iron Is Hot: Now Is A Great Time To Sell A Business” describes the internal and external factors that you should take into consideration when you’re planning to sell your business. Internal factors include company financials, valuation, growth cycle, and profit history. The best time to get the highest price is when sales and earnings are trending upward. External factors that affect a business sale include the economy, industry trends, competition, stock market volatility, investor confidence, interest rates and geopolitical considerations.
Timing and the life cycle of your business is one of the most important factors. The right time to sell will be when your business is still in its growth stage before it reaches the peak of the growth cycle. Buyers pay the best prices when they can’t see the top, so it’s a good idea to sell when the business is still on the upward trend.
The number of businesses purchased in the US in 2017 reached record-breaking numbers and 2018 is predicted to be even better. There are more buyers than available businesses on the market which makes for very favorable conditions if you’re thinking of selling your business.
A recent article posted by Divestopedia entitled “’I Sold My Business at 10X Multiple.’ A Multiple of What (and When)?” offers answers to key questions about what multiple a business sold for and what metric this multiple should be applied to. The most commonly seen multiple for public companies is that of after-tax net income and for established private companies it is most often a multiple of EBITDA. EBITDA, which is the earnings before interest, taxes, depreciation and amortization, allows for the comparison of profitability between companies because it cancels out several effects on profitability. The difference between an EBITDA multiple and other multiples can vary widely across industries.
Another important factor is the period the multiple applies to. The standard is to use a historical multiple such as a run rate or trailing twelve months (TTM). Knowing if a historic or projected EBITDA multiple is being applied can make a huge difference in determining if it is being appropriately valued.
Many more additional factors can also affect the net multiple paid, such as if the buyer assumed any debt, if there were working capital adjustments or if the amount was paid in cash or paid over time. If someone says they sold their business for a high multiple, just remember there are a lot of other factors that go into determining the value.