I recently sold a construction type-business. I won’t get into too many specifics to abide by confidentiality agreements.
The seller was referred to me by a CPA/tax advisor as our companies, National Business Valuation Services (NBVS) and National Transaction Advisors (NTA), are known nationally for providing business valuation and M&A transaction services (mostly on the sell-side; that is, we, NTA, sell businesses).
Our deep experience in the valuation and the actual buying and selling of companies sets us apart from most appraisers. Most business valuators have never sold a business. Additionally, most of them have not had NBVS’ experience (since 1994) of providing business valuations to over 10,000 business brokers and other business intermediaries (“collectively “M&A intermediaries”).
As such, their sellers may not have a realistic pricing range before the business is brought/unveiled to the marketplace. Valuing thousands of businesses about to be placed on the market by M&A intermediaries, and following them through the sales process, has provided us with a huge database of valued businesses that have sold. Actual valuation and closed transactions are experiences you just can’t buy.
Our seller was excited. His friendly competitor (the “competitor’s Deal”) was going to pay him 1x EBITA (Earnings Before Interest Taxes & Depreciation).
Imagine that – only 1x EBITDA – I couldn’t believe it as his EBITDA was well over $800,000. I thought to myself, there’s got to be something wrong with the business, and/or I don’t know the whole story. How could the buyer, with a straight face, offer a seller only 1x EBITDA?
Over the next 30 days I had to have repeated conversations with the seller not to do the “competitor’s deal”. I knew his business was worth more than just 1x EBITDA, and I needed to build trust with the seller and show him how I knew his business was worth more – a lot more.
Finally, he engaged us to value his business. Once we began the valuation process, we discovered that the seller had a high degree of personal goodwill (PGW).
What is personal goodwill? Our next article will describe personal goodwill in more detail.
Understand, a business whose seller has a high degree of personal goodwill usually means the following: it’s a personal service business, the revenues are dependent on the owner and his/her relationships; the product or service knowledge rests with the owner. The business really attaches to the owner/seller.
Back to our story…
The seller decided to engage NTA and to sell his business. We began showing the business, and the marketplace responded with many interested buyers.
There was no doubt in my mind that the business would sell for more than 1x EBITDA – and it certainly did – greater than 3x!
I knew that his business would be attractive to the right buyer. We were successful in finding a buyer who understood the issues around PGW, and we were able to structure a deal that allowed the buyer to get comfortable with the business and its owner who had a high degree of PGW.
