If you own a company, which decision would you make in the future? Accompanying your business to cultivate it as your baby or selling it when it has become mature? Some entrepreneurs will sell their companies after making a business valuation to enjoy their retirement or to establish a new startup.
On one hand, some will say that it is too early for many business owners to consider this question. According to a survey conducted by Fortune Magazine, more than 50% of entrepreneurs who were born during baby boomer generation plan to sell their companies in the next 10 years, but only 10% of them have officially planned to perform. A majority of entrepreneurs hope to leave their companies to their offsprings. Nevertheless, only 44% of small and mid-sized businesses were finally inherited by family members in Germany which means most of these firms were closed or sold.
On the other hand, a long-term exit plan is a tool which can help entrepreneurs refund capital as long as they want. Also, according to the point by Peter Cowley, a successful entrepreneur and angel investor from Cambridge, angel investors always use the exit planning to assess whether entrepreneurs have the same viewpoint as angel investors’ through requiring entrepreneurs to submit an exit planning report to examine how much they know about the business and the industry. Certainly, the exit planning strategy will be consistently changed in order to adapt different development stages of the company. In this way, investors have planned to exit from startups which they invest at the very first beginning.
The company merging procedure may cost several years, then what entrepreneurs should prepare for and how they make a business valuation?
First, as an entrepreneur, you need to consider clearly what you want. You want to sell the company to enjoy your retirement, start a new business or to join the management as a new member of the board. The selling price is not absolute which significantly depends on your initial idea and assumption. Each option will affect the final selling price because entrepreneurs will use different methods and attitudes to assess the business value.
Second, entrepreneurs should also consider that they are going to sell their companies under what kinds of conditions and in what timing, in the stage of growth, maturity or decline. In the stage of growth, the business value is ambiguous. In the stage of maturity, the profitability is attractive to both potential buyers and business owners. However, the selling price will be deliberately forced down by buyers in the stage of decline.
Third, which form do you like to receive the capital? In cash, in publicly-traded stock or a combination form? Because each way will affect your life plan in the future.
Peter Cowley also suggests that entrepreneurs should think about these questions 5-6 years before they actually perform.
Now that you have made a decision, the first thing you need to perform is assigning your accountant to show you the company’s financial statement at least 3 years in the past. A detailed financial statement is always required. Once any potential merger opportunity is approaching the company, a well-documented financial statement can help the entrepreneur not only forecast the situation of the business and the environment of the industry but also lift the business value to acquire a higher price through indicating the profitability and the competitive power. Although this kind of forecasting is not precise enough, it is required.
Moreover, Fortune Magazine advises that entrepreneurs should build a believable team of consultants to listen to suggestions from different fields such as taxes, accounting, law, investment banking, business operation and psychology. This way, entrepreneurs can significantly avoid making serious mistakes such as lacking of power of the company, being hung by the management or the board, and failing to transfer the ownership. Nazaire & Co. offers services of mergers & acquisitions, taxes, accounting and more to help you perform the business more smoothly.
Financially, entrepreneurs can invest the cash flow in order to avoid potential risks of profit loss before they successfully sell their companies.
Compare Different Business Valuation Methods
Once you have hired consultants and built the team, you need to trust these experts to evaluate and compare different methods of business valuation and to choose one option which can maximize your benefits. Sometimes, adjusting the business model and separating the business into several parts are necessary need to maximize the business value.
Valuadder offers three methods of business valuation:
- a) Asset approach,
- b) Market approach, and
- c) Income
And Valuadder lists several factors which can extremely affect the business value:
- a) The value of the company’s asset base,
- b) Business earnings history,
- c) Business earnings projections in the future, and
- d) The business cost of capital, including debt and equity.
According to the viewpoint from Bizfilings, the most common method is the business historical earnings method which allows an appropriate value for the goodwill of the business over and above the market value of the assets because the historical financial statement provides a conservative and reliable indication and a growth trend of the business earnings power in the future. However, when a larger company is going to purchase a small business, the thing that makes the larger company looks important is the future of this small business. As a result, the larger company will calculate the business value through a future earnings valuation method.
Different business valuation methods result in different results of the business value. In that way, entrepreneurs need to realize that buyers will also emphasize the method which can maximize their benefits when you are doing so. Even, the result will vary when entrepreneurs and buyers use the same business valuation method because weights of the expected business earnings power that set by different people are variable. It will take a long period for two parties to negotiate the business value and the selling price.
In addition, the entrepreneur should follow the suggestion from consultant team to lower the personal income tax by comparing these three methods.
Select and Apply One Business Valuation Method
After the consultant team receives sufficient data to calculate and organize three reports conducted by three methods, the entrepreneurs should choose one of them as the main method of calculating the business value. But the rest of two can also be the reference to cross-check the main method.
For some entrepreneurs, it is difficult to choose one method because each method has its advantage. At this time, you should ask yourself the original intention of selling the company which was mentioned in the section of “Planning”.
Then, make a balance sheet to describe the advantages and disadvantages of the result of the business valuation to negotiate with the buyer. Usually, the entrepreneur will set a long list in the section of advantage. Vice versa.
As long as entrepreneurs receive the business value by using the business valuation method(s), then they can look for the potential buyers or negotiate with intentioned companies.
Once the negotiation begins, entrepreneurs will be under pressure and should pay more attention to achieve the deal at the highest selling price. Before completing the deal, the company should not start any risky investment project which will lower the negotiating bets and miss the high selling price.
Please be mentally prepared because the negotiation will take a long period of time, which can almost exhaust both the business owner and the buyer. After you successfully sell your company, the most difficult thing is adapting your new lifestyle and enjoying it.