Wednesday, February 17, 2010

WHAT’S YOUR BUSINESS WORTH NOW?
How an Economic Recession Affects the Sale Price of a Business

There’s a very old, scientific method that many businesses owners believe may be used to value their own companies. It looks something like this: Business Value = MMM, or “Make Me a Millionaire.” Now, if there’s a partner, that’s a different story. The formula changes to “MMM times 2” so that so each guy can get a million…

How has today’s business environment changed the value of your business? Can a business owner still expect to get a million dollars for his or her efforts? What areas are buyers, banks and professionals focusing on to get deals done?

The first point to understand is that not every business is worth a million dollars. Some are sold for much more while many others are sold for much less, but no business value was ever based on “the owner needs a million dollars to retire” theory.

While most investors are familiar with the phrase “buy low, sell high,” the dramatic price swings we’ve seen in the financial markets are less pronounced with the sale of a privately owned business. In other words, while the Dow Jones Industrial Average may go from 14,000 to 8,000 to 10,500 over a period of 18 months, the multiple of earnings paid for private businesses fluctuates much less than multiples paid for publicly traded stocks.

The primary reason should be obvious: there is no organized marketplace to sell privately owned businesses. Small businesses are not traded every day like big, public companies and that’s why CBI was created: to provide a confidential market through our own network of ten company-owned offices. We are the only regional firm in the Northeast, with a presence stretching from Lake Placid to Halifax, Nova Scotia. Since prices do not change as much, a down economy and a down “market” actually have a much less pronounced affect on the value of a privately owned company. So, the economy may not have as much impact as you would think.

Will a Bad Year Decrease the Value of Your Business?

The simple answer should be, “No. One bad year does not decrease the value of your business.” As with most simple answers, however, there’s more to it than that! The ability to explain WHY there was a bad year to a buyer, a bank and their professional advisors is essential to completing a transaction in today’s environment.

To achieve full value, we must be able to create a detailed map showing the Company’s ability to generate increased cash flow in the future. FUTURE CASH FLOWS are the number one driver of business valuation. The ability to present those future cash flows to a buyer, a bank and their professional advisors is the number one service most business owners require to maximize their value. The second value driver that business owners should know is how INTEREST RATES affect value. Lower interest rates make a business more affordable for a buyer as lower rates mean lower monthly payments. No one expects interest rates to remain this low after the economy turns around, and that factor is completely out of your control.

HOW ARE BUYERS and BANKS LOOKING AT BUSINESS VALUE?
Are banks lending? How are they structuring deals?
Are there any real buyers out there, or just people looking for a good deal?
THE BANKER’S APPROACH
Banks have always looked for collateral and the ability to repay the loan! Basic underwriting standards have not changed, today’s environment just puts a premium on both factors.

Businesses with real estate are more desirable today because the collateral is easily identified, but banks may also rely on SBA guarantees to serve as collateral for those businesses without real estate.

One ‘bad year’ may be explained, but two bad years in a row begins looking like a trend. If business was ‘bad’ in 2008 and 2009, a full ‘good’ year for 2010 may be needed, and possibly even for 2011.
THE BUYER’S APPROACH
Buyers have always looked for a “good deal” and those buyers - whether companies or individuals - have two basic criteria for a good deal:
1.) Will this business be able to make the monthly payments
2.) Can this business generate enough annual income – after making those monthly payments – to meet their needs.

These factors have not changed in CBI’s 34 years of selling private companies. Today, interest rates remain at an all-time low, however, that is not expected to last. Interest rates have a pronounced impact on the monthly payments and how much a buyer can afford to borrow.

TODAY might just be the most opportune time to purchase a business in any of the past 5 years.
Selling a successful business is the culmination of years of hard work. The sale of your business should be a continuation of this success. Planning and implementing an exit strategy will enhance this final success.