Category Archives: Valuation

Risk and Reward in Business Valuations

by Kelly Deis of SoundPoint Consulting

In its simplest form, the value of a business can be boiled down to just two components: risk and reward.
Although a significant amount of thought and rigor is required to determine the value of a specific business, the underlying concept remains the same: the value of a business is equal to the economic benefit (earnings or cash flow) that it generates divided by the risk it takes to generate those benefits.
Value = Earnings (or Cash Flow)
 Risk
Think of it this way. If two companies generate the same amount of cash, which one is more attractive (valuable) to investors?
  1. a Fortune 500 company in business for 35 years with revenues locked in for the next 5 years
  2. a start-up with an untested management team, dubious business plan and volatile revenue stream
Of course, the right answer is 1).
So, while earnings are important, don’t forget to focus on risk as well. They both play an important part in the value equation.

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When the time is right, how will you exit your business?

by Kelly Deis of SoundPoint Consulting

Retiring from your own business isn’t as simple as calling HR and telling them you are ready to go. How exactly does one leave their own business for the good life? Here are a few options.

You started your business 10, 20 or even 30 years ago. It has been good to you. You’ve built it from infancy, fed it, grew it and, in turn it has provided you a comfortable lifestyle.

But, you’re done, or you want to be done. You are ready for the good life that retirement promises. But there is only one catch – there is no playbook for retiring from your own business.

As a business owner, there are several options available to exit your business. Here are a few…

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The 3 Pillars of Business Value

by Kelly Deis of SoundPoint Consulting

Most business owners focus on increasing profit margins as the primary means of improving the value of their business. Profitability is absolutely important, but it is not the only factor to consider.

In fact, there are three components which can increase – or decrease, the value of a business: risk, profitability and growth.

Take for example a recent client. We determined the valuation of the business to be about $1 million.

We then illustrated that if they were able to incrementally decrease risk, improve profitability and accelerate growth, they would be able to realize as much as $300,000, or 30% of additional value.
  • Decrease risk (discount rate) 2 pts: +$80,000
  • Increase profitability 10%: +$100,000
  • Increase annual growth 2 pts per year: +$120,000

Now, will this client be able to realize the full $300,000 in incremental value? It really depends on the timeframe and level of effort that they want to put into improvements. It is a good idea to identify the range of opportunities and then prioritize activities.

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Options in selling your business: asset vs stock sale.

by Kelly Deis of SoundPoint Consulting

So, you want to sell your business. For most of us, it is a once in a lifetime event. There is no reason to expect that you should know the intricacies of a transaction.

That is why it is oh so important to have good advisers help walk you through the process.

One of the fundamental decisions you will need to make is whether the transaction will be an asset or stock sale. It will depend upon your individual circumstances as well as your business structure.  Continue reading

Do you think you might want to sell your business?

The Value Gap

by Kelly Deis of SoundPoint Consulting

business for saleHave you ever heard of it? Well, if you are thinking of selling your business in the next few years, it is a term that you should get familiar with.

The value gap is the difference in price between what the seller thinks his/her business should sell for and what a buyer is willing to pay for it. Bluntly, it is unrealistic expectations on the part of the seller.

Sadly, it is one of the bigger reasons why deals go awry in the lower-to-mid market tier. And, it can be avoided.

Causes of the Gap

There are a variety of reasons why a seller may think that their business is worth more than what others are willing to pay for it.

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Selling your business? Timing is everything.

by Kelly Deis of SoundPoint Consulting

Owners want to sell their businesses for for a variety of reasons – some want to retire and others are ready to move on to something else. Most owners ask – “is now a good time to sell?” Not surprisingly, the answer is, “it depends”.

Here are three factors to consider when timing the sale of your business. Of course, it is best when all three are optimally aligned, but that is not always possible.

The State of the Owner

The owner is critical to the success and ultimate value of a business. Typically, once the owner is beyond his or her prime, the business value will begin to falter.

It is best to sell when the owner is engaged, still excited about the business and perhaps wiling to stay on after the sale. Likewise, the more youthful and healthy the owner the less they will appear eager to sell.

You want to be the owner that wants to sell, not one that has to sell.  Continue reading

How much is your business worth?

It’s not all about the bottom line.

by Kelly Deis of SoundPoint Consulting

Most business owners focus on increasing profit margins as the only means of improving the value of their business. Profitability is absolutely important, but it is not the only factor to consider.

In fact, there are three components which can increase – or decrease, the value of a business: risk, profitability and growth.  Continue reading

Thinking about buying or selling a business?

Make sure you understand buy-sell agreements.

by Kelly Deis of SoundPoint Consulting

Buy-Sell Agreements are legal documents that govern how ownership will change hands in privately owned companies if and when something significant happens to one of the owners.

These agreements are intended to ensure the remaining owner(s) control the outcome during critical transitions, while making sure the transitioning owner (or their estate) are treated fairly and equitably.

Although owners may have the same interests while both are in the company and all is going well, these same owners may have wildly divergent desires and needs after a triggering event occurs.

It is not too hard to imagine a scenario where one wants operational stability while the other needs liquidity. For instance, if a partner dies, the remaining owner wants business as usual, while the deceased’s estate wants to cash-out.

The interesting thing about Buy-Sell Agreements is that you do not know which side of the transaction you will be on when the agreement is drafted. Because of this, it is in both party’s interest to make them as fair and equitable as possible.

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Ask SCORE: What do I need to know before buying a business?

Rather than building a small business from the ground up, buying an existing company offers the opportunity to move along the path to entrepreneurship more quickly. With all of the startup tasks already taken care of, a staff in place, an established customer base, existing vendor relationships, and processes and procedures laid out, you have a head start.

But that doesn’t diminish the importance of doing your research before making the decision to buy. Acquiring an existing small business requires substantial examination so you can avoid the many pitfalls that befall eager entrepreneurs who leap before they look.  Continue reading

4 Things To Do Before Your Sell Your Business

by Kelly Deis of SoundPoint Consulting

The ideal time to start preparing to sell is two years before the date you hope to sell by, says Curtis Kroeker, general manager of BizBuySell. The more advance preparation, the better. Even if you don’t plan that far ahead, there are several steps you should take before putting your business on the market.

Get your house in order. “The most important thing to do is to make sure your business is performing as well as it can,” Kroeker says. Now is the time to assess your cash flow, your expenditures, your tax strategy and other elements of your operation to see whether they are optimal.

Consider the timing. It’s always easier to sell a business when it’s on the upswing. For this reason, owners of seasonal businesses should look to sell soon after their busy season begins, Kroeker says. Plan ahead and you won’t find yourself desperate to sell during a slump.

Consult with experts. There’s no shame in seeking expert assistance. If structuring the sale in a tax-friendly manner, setting a price or other parts of the process are too much for you, consult your accountant and consider getting a business broker to handle the sale. That way you can focus on doing what you do best: running your business.

Show buyers a bright future. “When a buyer buys a business, primarily the focus is going to be on the proven track record,” Kroeker says, “but there is also the future potential [to consider].” He recommends putting together a growth strategy to show potential buyers. One of your greatest assets as a small-business owner is your intimate knowledge of your own operation; use that to point out opportunities for the new owner to expand the business. The few days’ work it requires may pay dividends in a sale.