The Following is an excerpt from The Privately Held Company Newsletter:
It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.
Quality of the Earnings
Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be: meeting some new governmental guidelines, paying for a major lawsuit, or even adding a new roof on the factory. The argument is made that a non-recurring expense is a one-time drain on the "real" earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expenses (or expenses) that come up almost every year. Theses add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.
Sustainablity of Earnings
The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn't want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract etc. Will the business continue to grow at the same rate it has in the past?
Verification of Information
Is the information provided by the selling company accurate and timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables?
The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.
Monday, May 12, 2008
Wednesday, April 9, 2008
Is This A Good Time To Sell?
The National Political Scene and Taxes
Barron's Speaking of Dividends column ( Dec. 31, 2007) should serve as a wake up call to all business owners with regard to tax policy after the next election cycle. Even if the GOP wins the White House, a Republican president will probably be dealing with a Democratic Congress. The more likely scenario is an all Democratic government. Under current law, it would take an act of Congress to keep the dividend tax rate at 15% otherwise it will return to 39.6% in 2011. It is possible that Democrats will decide to keep the dividend and capital-gains rate equal to each other, which would imply that both would increase to as low as 25% but more likely 28%, nearly double the current 15% rate.
Interest Rates and Inflation
Maintaining a lid on inflation continue to be a central focus of the Federal Reserve. Bench mark interest rates have decreased, credit appears to be tightening, but borrowing rates for acquisitions of successful businesses remain low. However, with a continued strong economy, the cost of borrowing is likely to increase. Other things being equal, "value" and interest rates work inversely to each other-as rates move higher, value moves lower.
Private Equity Groups
Demand for business acquisitions from all sectors-high net worth individuals, corporations, and private equity groups-all remain strong. Private equity groups in particular have been an aggressive force in acquiring middle-market transactions--we have managed transactions to equity groups where the purchase prices have been as little as $5 million. These groups have money and need to utilize these funds. We are just learning about some of the advantageous tax rates utilized by these groups. The tax loophole of capital gains treatment for management fees are likely to be eliminated. Further, if investments by equity groups fail, and some will, demand from these groups may taper off.
Barron's Speaking of Dividends column ( Dec. 31, 2007) should serve as a wake up call to all business owners with regard to tax policy after the next election cycle. Even if the GOP wins the White House, a Republican president will probably be dealing with a Democratic Congress. The more likely scenario is an all Democratic government. Under current law, it would take an act of Congress to keep the dividend tax rate at 15% otherwise it will return to 39.6% in 2011. It is possible that Democrats will decide to keep the dividend and capital-gains rate equal to each other, which would imply that both would increase to as low as 25% but more likely 28%, nearly double the current 15% rate.
Interest Rates and Inflation
Maintaining a lid on inflation continue to be a central focus of the Federal Reserve. Bench mark interest rates have decreased, credit appears to be tightening, but borrowing rates for acquisitions of successful businesses remain low. However, with a continued strong economy, the cost of borrowing is likely to increase. Other things being equal, "value" and interest rates work inversely to each other-as rates move higher, value moves lower.
Private Equity Groups
Demand for business acquisitions from all sectors-high net worth individuals, corporations, and private equity groups-all remain strong. Private equity groups in particular have been an aggressive force in acquiring middle-market transactions--we have managed transactions to equity groups where the purchase prices have been as little as $5 million. These groups have money and need to utilize these funds. We are just learning about some of the advantageous tax rates utilized by these groups. The tax loophole of capital gains treatment for management fees are likely to be eliminated. Further, if investments by equity groups fail, and some will, demand from these groups may taper off.
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