Tales from the Trenches: Valuation & Deal Tips from National Transaction Advisors

In our last article, we discussed business valuation and transaction deal tips and stories that you just can’t make up, such as:

• 70%-80% of Listed Businesses Never Sell!
• Absentee Owners: MAKE SURE THE KEY WORKS!
• WAITING FOR THAT “SUITCASE OF CASH” -A True Story.”

As a continuation, here are some additional misconceptions about pricing and selling a business as well as some transaction deal tips that I’ve learned over the years.

MORE DEAL TIPS- Why Most Businesses Listed Do Not Sell.

There is not enough Seller’s Discretionary Cash Flow (SDCF) to justify the purchase of the business and provide a reasonable return on investment (ROI).  We created a tool which we call the Justification of Purchase (“JOP“) to analyze if a deal makes sense, as a “Sanity Check.”

A JOP highlights the four (4) minimum requirements that most buyers will seek when making acquisitions. It reviews the pricing and terms of an acquisition (based upon normal industry deal terms and current economic, finance and capital market conditions), and determines whether the SDCF is sufficient to pay for the following:

• 1) the projected debt service (principal and interest);
• 2) a debt service cushion;
• 3) possible new capital expenditures or deferred repairs and maintenance; and,
• 4) A new owner/operator salary.

If the SDCF will not cover the above 4 minimum requirements, then it is unlikely that anyone would buy it. Granted, sometimes there are other reasons to make a purchase/sale, but we do not see them very often.

The Business Was Never Valued – Price and Deal Terms are the two most common reasons why businesses do not sell.

A business sell-side engagement should not be accepted if the business has not been valued by a pro – someone who regularly values businesses. It is best if this is done by a professional valuation firm that actually has experience valuing businesses in contemplation of sale and/or an M&A advisor who regularly values businesses.

The wrong pricing is probably the biggest reason for a business not selling. Most owners do not take the time to get their business professionally valued and are OK with just “winging it.” We have never been a big fan of this method unless it is explained up-front, and all the parties agree that if the market responds with lower bids or offers, there will have to a downward adjustment to the asking price.

We provide clients with realistic deal terms, including seller note requirements, which assets are included or excluded, asset or stock sale, and a realistic timeframe to complete the sale.

Our valuations show what the client should expect in the marketplace – reflecting the current fair market value. Our business valuation and M&A advisory firms are unique in that they have the transaction background to really comment on deal terms and provide realistic analyses and expectations.

Like I said at the beginning of this article, you really can’t make some of this stuff up.