When It Comes Time To Sell The Company, Being Prepared Will Impact The Sale Price

The sale prices of similar companies often vary widely. The difference often rests on the quality of the seller's preparation. Merger and acquisition specialist Scott Ryder offers some preparation tips.

Picture this scenario: On the same day, the owners of two companies complete transactions to sell their respective companies to two separate buyers. The two companies being sold are nearly identical. They have similar products and services, serve similar markets and have similar revenues and profitability. Yet one sells for $11 million while the other sells for $17.5 million. Why such a difference?

Despite surface similarities, there are probably hundreds of factors that make these two companies more or less attractive as acquisition candidates, thereby increasing or reducing their respective values to a buyer.

Understanding these differences is critical to any seller, and it is the main reason why owners of small and midsize businesses (who are rarely experts in mergers and acquisitions) seek professional representation when selling their companies.

Merger and acquisitions valuations have changed significantly over the last few years.

Just a few years ago, public companies were being handsomely rewarded in the financial markets just for making acquisitions. Consequently, many were grabbing up every perceived synergistic deal they could find, almost without regard to the price. However, buyers are now examining the values of potential acquisitions much more cautiously — conducting greater due diligence and exhibiting more skepticism toward the seller's projected performance.

We still see premium valuations in the marketplace, but these values are typically being obtained by sellers who are well prepared to run a thorough and efficient selling process. Below are some basic guideposts to follow on the road toward a successful and lucrative business sale.

Understand Your True Market Value

The first step business owners must take is to assess and understand their company's market value. Many business owners do not want to dedicate the time or money necessary to learn their company's true value in the market.

Some believe it is too difficult, or they don't have the right skills or resources; others think they already have a pretty good idea of what it is worth (and they're usually wrong).

Knowing the company's value in advance puts the seller at an advantage. Determining the market value for a privately held business is as much art as science, but a professional, experienced valuation team can provide a valuation that instills confidence in the seller when approaching and negotiating with prospective buyers.

Every business is unique, and there is no single, simple formula for determining market value. Rather, it is the culmination of a thoughtful, time-consuming process that requires extensive market research and financial analysis to reveal the company's future potential under new ownership.

Step One: Gather Financial Statements

The process usually begins with recasting the business's historical financial statements, typically the balance sheet, income statement and statement of cash flows.

As part of this recasting, certain expenses and extraordinary items legally used by private, owner-managed companies to define tax benefits are eliminated, and other adjustments are made to conform to generally accepted accounting principles.

These adjusted financial statements offer potential buyers a normalized view of the company's past performance.

It is important to remember, however, that buyers buy the future, not the past. Therefore, while essential, these adjusted historical financials alone do not determine a seller's optimum value to a new owner. Rather, they serve as a starting point for building "pro forma" financials, which look five years into the future and are the basis of market value.