How to value & exit your company
In recent years, an aging population and tremendous U.S. wealth creation have created a need for business ownership transition and succession planning. This trend should continue and accelerate in the upcoming decade, making it imperative that business owners recognize the most fundamental and important challenge they face: valuing their company.
An accurate valuation not only helps owners execute a business succession efficiently, it preserves wealth and the business’s future growth prospects.
Certainly a business owner may execute an “exit event” for many reasons: gift and estate-tax planning, death or disability of the primary owner, divorce, bankruptcy or an offer from a prospective buyer.
In every case, a properly executed valuation is critical, and each type of exit event requires unique considerations that owners should recognize to protect their interests.
Owners often believe they have a strong understanding of their business’s value, based on their experience with the company. Unfortunately, this “personal valuation” may not fully reflect certain market conditions and other key factors. It may also be inconsistent with what prospective buyers are willing to pay.
A variety of factors may be to blame. For instance, the value of a small or medium-sized business may include significant personal goodwill of the founder due to individual skills and customer relationships. In such instances prospective buyers may argue that a discount is appropriate, out of the assumption that once the owner exits much of the value may be lost. Additionally, owners preoccupied with running the business may neglect the business-value drivers that significantly affect the value of their ownership.
Owners may also rely on distorted or inaccurate information regarding the business’s value, due to rule-of-thumb values provided by brokers or hearsay.
To sell a business, the seller also of course must find a buyer willing to pay the desired price. But different levels of value may apply to the business, and the price may vary significantly, depending on who the prospective buyers are. For instance, a strategic buyer may offer a premium for the value of the business to eliminate the competition, acquire the customers or key suppliers or expand the company’s market share. This “strategic value” is the highest possible value a business owner may get and typically involves dismantling the business or incorporating it into other operations.
Then there are buyers interested in keeping the business intact and providing management and financial support as necessary to ensure future growth and profitability. These “financial investors” usually pay less than strategic investors due to their interest in maximizing their return on investment.
Third, there are opportunistic buyers who want to capitalize on an advantage they may have over exiting business owners. These buyers usually offer a price that equates to buying an asset in a fire sale.
Most of the exit events described focus on maximizing the after-tax proceeds at the lowest risk possible, regardless of whether the event is planned. But maximizing after-tax proceeds requires the development of a blueprint for any successful transition.
A successful plan starts with expert advisors who, with a team of experienced tax-planning and valuation professionals, will identify and execute the most appropriate exit options. If a business owner procrastinates or chooses not to proactively plan an exit strategy, he or she may incur significant losses once the transition time arrives.
Clearly, the succession-planning process requires a deep understanding of the factors that drive value. At MBAF, skilled business-valuation professionals are dedicated to making the succession-planning process efficient and successful.
By Emilio T. Escandon, CPA, MBAF Principal, with contributing authors: Tony Argiz, CPA/ABV/CFF, ASA, CVA, CFE, Chairman, CEO, MBAF Principal; Richard Weiss, ASA, MSA, MBA, MS, MBAF Director; and Steven Blumenthal, CPA, MBAF Principal, who can be reached by email at email@example.com or by phone at 1-800-239-1474.