Business Appraisers, before beginning an assignment, like to know the purpose of the appraisal. Usually the assignment demands “bullet proof” documentation: comparables, EBITDA multiples, projections, discount rates, etc. Unfortunately, in situations where the purpose of the valuation is to establish a selling price, the business appraiser really doesn’t understand the business elements – or, since these business elements don’t figure into the numbers, they are largely ignored. However, they do have value; in some cases, significant value to a buyer.
Valuing these business elements requires that computers, adding machines and calculators be put aside. The business should be looked at from three key business elements: the Market, the Operations, and Post-Acquisition. These elements are certainly subjective, but also critically important to a prospective buyer. A buyer’s opinion of the business elements can drive the actual offering price significantly higher—or lower. In fact, the business elements such as Fundamentals and Value Drivers can impact price as much as the Financials.
Here are some important questions to consider:
Market:
Are there significant competitive threats?
Is there a large market potential?
Does the company have a reasonable market position?
Are there broad-based distribution channels?
Is there a wide customer base?
What’s the company’s competitive advantage?
Operations:
Are there significant alternative technologies?
Is sound management to remain?
Is there product/service diversity?
Are there multiple suppliers?
Many business owners feel that what prospective acquirers are looking for are quality and depth of management, market share, profitability, etc. Brian Tracy, in his book, The 100 Absolutely Unbreakable Laws of Business Success, states that the key ingredient is “a company-wide focus on marketing, sales and revenue generation. The most important energies of the most talented people in the company must be centered on the customer. The failures to focus single-mindedly on sales are the number one causes of business failures, which are triggered by a drop-off in sales.”
Tracy goes on to point out that company owners and/or presidents should observe industry trends, pay attention to what the competition is doing that works, and learn from them. Find out what is successful and what isn’t in your industry – trends are vital. It is important to understand that established and mature companies are generally just trying to protect their market share, while start-up companies are really attempting to gain or establish market share.
Tracy estimates that 80 percent of new businesses close down within the first two years, and 100 either fall off or join the top 500 companies in the U.S. because they are acquired, merged or broken-up, and even a few actually fold – Enron being a good example.
Tracy also mentions that problem solving, decision making and team (not individual) collaboration are key factors. However, as he points out, the best companies have the best people.