I have met with scores of underperforming business owners over the years and delivered the bad news: it is close to impossible to get an acceptable price (to the owner) for his/her business given the industry standard of valuing businesses at a multiple of cash flow.
After years, maybe decades, of owning and managing your business, you have decided it is time to sell. Without question, the very first thing you should do is locate and carefully review all of your leases (operating, real estate, equipment, etc.), licenses, customer purchase orders, vendor codes, blanket orders, supplier contracts, floor plan arrangements, consignment relationships, and the like.
Last month we addressed the role inventory plays in the value of service, professional, IT, retail, and distribution businesses. The issue of manufacturing inventory is generally far more complex than these other industries.
For industries such as retail, distribution, and manufacturing, disagreements over the value of inventory can kill deals. It is basically a non-issue in the valuation process when it comes to industries with little or no inventory like service, professional, IT, etc.
For retail and distribution businesses, the role inventory plays in the valuation process would seem to be pretty straightforward: the overall value of the business is the sum of a multiple of the earnings of the company and the cost basis of the inventory.
Disclosure schedules are attachments (addendums) added to the Asset Purchase Agreement (APA) by the seller to memorialize all of the little things that were reviewed, discussed, and generally agreed upon verbally. By putting these in writing, it can stop future disputes on one or more of these items. Otherwise, what starts as a simple disagreement between you and the seller could result in a lawsuit and/or cause the buyer to withhold payments on the seller note.
Our client, the owner of a very successful quasi manufacturing business, accepted an offer on his business from one of several prospective buyers we brought to the table. It looked like a (relatively) easy deal to close with minimal banking and lots of buyer cash. And as seller cash, A/R, and all liabilities were excluded assets from the sale, the deal price was essentially fixed assets, inventory, and goodwill. What could go wrong? Two things actually.
I learned a valuable lesson during a business brokerage deal this year. One I hope provides some insight for you as well. As a business broker, I represented a very successful company being sold to a 45-year-old, well-educated buyer with both money and success in earlier business ventures. Given the skill sets and financial strength of the buyer, my client (the seller) was untroubled with the LOI (letter of intent) which specified a seller note for 20% of the agreed upon $2.0 million purchase price. Wow, what could be better and easier for a business broker than this deal?
Business owners regularly ask us for a market valuation of their business. We are always forthright, as the valuations we establish are usually the benchmark prices for our listing and selling activities.
Every month or so a prospective seller, on receipt of our valuation, tells us that (a) s/he was hoping for a higher valuation, and (b) that s/he will “hang on” to the business for another couple of years, working harder to increase cash flow in order to get a more attractive business valuation and sale price.
This is part two of two in a blog series on fixed assets.
In part one, we ended with the owner of a marginally profitable business facing a dilemma of an asset rich operation likely viewed as only worth its liquidation value. How can this business owner sell his business for more than the mere value of the assets?
This is part one of two in a blog series on fixed assets.
You are contemplating the sale of your manufacturing business (or for that matter any business rich in fixed assets), and you are unsure how (1) your fixed assets are valued and (2) the impact the valuation has on the price of your business. These are good questions, and you should be commended for addressing the fixed asset dilemma before listing your business for sale.
The same fixed asset can have any number of different values depending on the intent of the valuation.