An integral part of the first stage of the exit planning process is the current valuation of the company. It is highly recommended that a business owner obtain an independent third-party business appraisal from a experienced business appraisal firm.
A Business Broker should not be the one to appraise the business and they are generally not sufficiently qualified to do so. The most important thing to understand is the issue of credibility and believability. Experienced and successful professionals in the business brokerage industry know this is generally the key to maximizing the sale price of the company, eliminating the largest portion of frustration and disappointment, and saving all parties involved a great deal of expensive time. While most owners believe that their company is worth more than what the actual value is, there are some instances in which the perception of their company's value is less than what it really is. A business appraisal from a well-respected, third-party business appraisal firm creates credibility and believability with owners, Investors and or lenders while at the same establishing a base line for improvements that can be made to maximize the future return at the eventual exit event.
A simplified valuation model can be expressed as:
Business Value= Cash flow* (1+growth rate)/ (Discount rate-growth rate)
The components of the equation are:
Cash Flow which can be expressed a number of different ways, including free cash flow, EBIT, EBITDA, pretax income, “owner’s discretionary income” or some other financial metric, depending on the type of business. (It is critical that the measure chosen is consistent with the discount rate chosen.)
Growth is the sustainable, long-term Income growth rate of the business. The valuation reflects that a company with sustainable growth is more valuable than one that isn’t growing.
Discount Rate can be expressed as the annual return the buyer requires to take on the risks inherent in a business. Professional business appraisers will “build up” the discount rate by aggregating a host of discount factors with experienced precision. It is these host of factors that become the milestones upon which to build the exit value. Some key elements that affect the discount rate in the favor of the business are:
· Evidence of sustainable profitable growth and cash flow
· Strong capable management team, not dependant on the owner or other single individual
· Products, services or processes with a defensible market position and a strong “brand” position
· Stable, diverse customer base without significant concentration in customers, products, suppliers, or geographic markets
· Recurring revenue business model
· Quality business and accounting systems with a solid business plan
· Low risk of technological, environmental or governmental disruption
Many factors affect the price of a business appraisal which generally ranges in cost from $2,500 to $20,000. However, most business appraisals typically average about $2,500 to $7,500. An independent appraisal is invaluable Owners information.
