12 Jan How Does Your Company Rate?
A short time ago I read an article dealing with the topic “How Does Your Company Rate?” While it was geared somewhat to companies who would normally be sold to a competitor, many of the points were relevant to all businesses. Using the points in the article as a base, I have modified some points to deal with sales to all qualified buyers.
Take a look at the following checklist ‑ see how your company rates. Rank each item on a scale of 1-10. (10 being the best) Be honest with yourself. Then, look at the checklist again through the eyes of a buyer who does not know your company or your industry as well as you do.
|Questions to Consider||You||Buyer|
|Your Market is Stable|
|Your Statements Reflect Profitable Operations|
|Your Statements Demonstrate Stability of Earnings|
|All “Add-Backs” to Arrive at Earnings are Supportable|
|Business Has a Stable or Growing Sales Record|
|No Significant Capital Expenditures Required|
|No Significant Competitive Threats|
|No Significant Alternative Technologies|
|Large Market Potential|
|Reasonable Market Position|
|Broad‑Based Distribution Channels|
|Wide Customer Base|
|No Dependency on One or Two Suppliers|
Now, using the scores from the “You” column, let’s assess some of the factors that create value.
If you have a score of 50 or less, cancel the order for the new car, drop the money into your RRSP, and hope the CPP fund stays solvent. If your score is between 50 and 100, you are being realistic but you have not yet “won your war on poverty”. If you scored above 100, we should talk. You are building real value in your business and you should ensure that you have a plan in place that will enable you to realize this value at the appropriate time. If your score is above 135, you are in the top 1/10 of 1% of the business community, you have a view of your business that may well not be shared by anyone else, or your math is wrong!
Now, how does your business look to a buyer? If the “Buyer” column totals more than 2/3 of the “You” total, or if the score is over 125, you clearly do not understand how buyers look at businesses. You may want to chat with your banker. He or she will be more than willing to tell you all the problems your business or your industry is having or will soon have. If you score “Buyer” above 75, and are still below 2/3 of your score, you may well be on the right course to making sure your business will be able to fund your active retirement. Less than 75 and the market may not be prepared to pay you a price that you may feel is appropriate.
I was recently visiting the owner of a successful private company. This man has been able to balance his work life and his personal life better than anyone I know. The conversation eventually gravitated to the topic of business valuation, and his issue concerned how a buyer factors into his or her calculation the untapped potential that may exist within a particular business. This was not the typical “but a new owner could…..” type discussion. This man had balanced both aspects of his life and did not push the business to the limit the next person might have. It was a valid issue.
In a public company, share prices are a function of future prospects of cashflow. High hopes for the future and brutal punishment if short-term results are off target are the norm. In a private company, the value is derived at through a combination of actual asset values and an intangible value based upon future prospects of cashflow. While credit is given for actually owning something, the premium for cashflow is lower than in a public company.
In assessing the worth or value of the intangible or cashflow driven portion, the buyer of a private business will always take into consideration the true current cashflow and all the factors that might affect that cashflow in the future. If you go back to the chart at the beginning of this article, and if you carefully read the 15 points again, you will realize that many of these points are about the future, not the past. The point is that buyers do factor into their assessment the potential for growth or improvement.
In reality, buyers are reluctant to voluntarily include these items and it takes skill to persuade the buyer and his or her advisors of the reality of these prospects. This is when the training and objectivity of a qualified business intermediary pays huge dividends. It is not just about the numbers, it’s about the outlook for growth – those things that make entrepreneurs go out and make things happen.
Mr. Crossman, President of M&A Canada Inc. is a Chartered Professional Accountant and Certified Business Intermediary. M&A Canada is a Nova Scotia firm dedicated to assisting owners of successful private companies sell their businesses. M&A Canada is a member of the International Business Brokers Association and a founding member of the Canadian Chapter of the IBBA. The International Business Brokers Association is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions.