To business owners, the value of the
companies they created, nourished
with capital, energy and time, and grew despite personal risks and inevitable
market ups and downs, is immeasurable.
The businesses and their assets are everything, and they are priceless — to the owners.
What is your business really worth? This
is important to understand whether you
are in the position to sell or not.
“Periodically during your business lifecycle, you should get a business valuation so
you have an estimate of the worth of your
business,” says Craig Johnson, president
and CEO, Franklin Bank, Southfield, Mich.
Johnson turns business valuation, the
second step for successful exit planning,
over to Franklin Bank’s wealth planning
and advisory arm: APB Financial Group
Ltd. and its president Mero Capo. “Valuing
your business properly enables you to transition out effectively,” Capo says.
Smart Business discussed with Capo
what buyers look for and how a seller can
properly value a business to maximize
gains when it comes time to exit.
When should owners value their businesses?
The key is to start early — well before
you anticipate exiting the business.
Valuation is a fluid process, and you need
to take the time to do it right. So begin as
you start your succession plan, at least five
years before you want to exit your business.
Before you begin the valuation process,
consider your personal finances. How
much do you need to get out of your business to maintain your standard of living?
Determine this early because the business’s value may not allow you to live as
you choose after exiting. In that case, you
will go back to the drawing board and
increase overall value through growth, by
trimming fat or increasing sales.
What are some preparatory measures to
maximize the value of a business?
Before you sell your business, you don’t
want to be running it out of your home and
tracking financials on scrap paper. You
need solid records, good, clean profit-and-loss statements and a set of operating systems that are productive, efficient and can
be transferred to a new owner. A buyer will
need a very clear picture of how your business operates and what kind of return he
or she can expect from his or her investment. Your house needs to be in order, and
your cash flow must be healthy.
What else will a third-party buyer look for in
a business?
Put yourself in the buyer’s shoes and consider what aspects of a company make it
attractive. For one, what is the economic
outlook for the industry and in what financial condition is the company?
As a seller, you should be able to effectively communicate the nature of your
business and its history. Is the company
one that can live on without you? Are key
managers in place, and will they stay
onboard following the transition to new
ownership? This is especially important if a
buyer from another industry is considering your business. People are a strong asset.
Finally, you’ll provide the buyer with the
net assets of your company. This is where
a business valuation expert comes in. He
or she will present the buyer’s point of view
and the true market value for your business.
What happens when owners overvalue their
businesses?
Basically, the business sits on the shelf.
But keep in mind, depending on your succession plan, you may not want the business to be valued at its highest. For example, if family will purchase the business
from you, you’ll want to mitigate tax costs
(gift tax and corporate gains tax) and also
ensure that the operation is within reach
for this person. If it is priced too high, family may not be able to afford the business,
and even so, the taxes may be prohibitive.
On the other hand, if you will sell your business to a third party, you want to maximize
your gains.
Once owners place a value on their businesses, what variables determine whether
they will get this value from buyers?
First, consider the economy during the
point in time you want to sell. Is your
industry in a downturn? This will impact
the value of your business to a buyer. Also
take a look at interest rates — the availability of money. If interest rates are high,
your cash flow should be able to pay the
buyer’s debt service.
If you value your business several years
before you plan to sell, you can exit at the
most advantageous time and maximize the
value of your life’s work.
MERO CAPO is president of APB Financial Group, Ltd., the
wealth planning and advisory arm of Franklin Bank. Reach him
via [email protected]. Reach Craig Johnson, president
and CEO of Franklin Bank, at [email protected] or (248) 386-9860.
