Selling your company requires more than putting a price tag on it and asking for offers. To maximize business value and the price you ultimately receive in a transaction, a valuation analysis should be performed to determine the company’s stand-alone fair market value as well as the value of potential economies of scale or synergies that would result from combining the target company with a particular acquirer.
The concept of a fair market value is defined as “the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”
Availing of independent, stand-alone valuation transaction advisory services helps identify the key value drivers that will serve to maximize your company’s value.
In order to maximize the value, you need to show potential buyers that your business has, among other things, the following strengths and/or opportunities:
- Strong financial performance – historical revenue growth and above average profit margins
- Growth potential – having a sound, credible and reasonable growth plan
- No significant economic dependence – the company is not overly dependent on the business owner, an employee, a customer or supplier
- Strong customer base – a recurring and transferrable customer base with the existence of long-term customer contracts
- Competitive advantage – your company offers a unique and meaningful product/service (i.e. market niche with minimal market competition)
- Quality financial reporting – accounting information systems provide accurate, relevant and timely information for decision making; also audited or review financial statements
It is important for shareholders to be able to articulate and justify the company’s intangible value to potential buyers (e.g. existence of customer relationships/contracts, workforce in place, policies and systems in place, intellectual property, patents, trademarks, copyrights, proprietary software, goodwill associated with the company’s location or brand name, etc.). To maximize the value it is critical to demonstrate that the business, including customer base, intangible assets, and goodwill are commercially transferrable.
Ultimately, shareholders should share information regarding the key strengths of the business, market competitiveness, market share and positive risk factors to showcase the business as a lucrative opportunity for prospective buyers. Shareholders also must have an action plan in place to mitigate any weaknesses or negative risk factors, should these be brought up in the process of deal negotiation by prospective buyers.
Maximizing stand-alone value is important but it is equally important to find potential special interest purchasers. According to the International Glossary of Business Valuation Terms, special interest purchasers are “acquirers who believe they can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining the acquired business interest with their own”.
A special interest purchaser would be willing to pay over and above the intrinsic or stand-alone value as a special interest purchaser premium. In order for a special interest purchaser premium to have value, it is assumed that more than one special interest purchaser exists in the marketplace.
In order to calculate the value of a potential special interest purchaser premium, the following should be considered:
- The potential after-tax cost savings a special interest purchaser could realize by combining the target with its own operations. These could include head office overhead costs (salaries, marketing, promotion, rent, etc.) that would be reduced after an acquisition;
- Potential sales increases a special interest purchaser could realize through a combination of i) selling its products to the target’s customers; and ii) using the target’s excess production capacity to increase operations and sell the target’s products to its customers; and
- Potential margin increases a special interest purchaser could realize by shifting more of the business from lower margin commodity sales to higher margin specialty product sales.
In any open market transaction, a purchaser will review a potential acquisition in relation to what economies of scale (e.g. reduced or eliminated competition, ensured source of material supply or sales, cost savings arising on business combinations following acquisitions, and so on), or ‘synergies’ that may result from such an acquisition. To maximize price, sellers need to demonstrate avenues of value creation and possible synergies to enhance the premium.
Ultimately, deal terms and price will be the result of negotiations with potential buyers. However, the more informed you are as a business owner regarding the value of your business to a potential purchaser, the better your chances of maximizing the price you receive in an actual transaction.