how to increase a vlaue of a business
DESCRIPTION
How Are Businesses Valued?The valuation of businesses has grown to be both a science and an art. To arrive at a defensible valuation a valuation expert needs to follow the standards and norms that have been developed by experts in the business valuation field. Many well intentioned valuation professionals fail to produce accurate and defensible valuations because they do not possess the knowledge of the "art". The art portion of valuation comes from the forces of the market and the constant changing dynamic of expected rate of returns for given risks.There are several commonly accepted valuation methodologies, the following are the most common methods: Capitalization of Earnings, Discounted Future Earnings, Adjusted Book Value, Comparable Price, Excess Earnings Capacity. The valuation expert will carefully utilize the appropriate methods and also utilize the the applicable weights to each of the methods to arrive with a accurate and defensible valuation.Buyers (Investors) of businesses place an extensive weight on the business's ability to generate sufficient earnings, since these earnings allow them to 1) pay themselves a suitable salary, 2) be able to service the debt incurred in the acquisition of the business, and 3) receive a appropriate return on their investment.TRANSCRIPT
We Transfer Business Success1
Brian S. MazarPresident/CEO
We Transfer Business Success2
Topic
Increasing Value of
Business
IntroductionTransition Plan
Buyer’s View
Valuations
Finance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success3
Value As Seen By The Market
• Positioning in the market place Strategic buyers Industry buyers Financial buyers
• Business continuity Balance short term and long term business needs Employee development and mentoring
Introduction
Transition PlanBuyer’s View
Valuations
Finance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success4
Planning Results In:
• Higher price Manage the factors that affect the valuation Quality financial reports inspire buyer confidence Attract a larger pool of buyers
• More favorable terms to seller• Reduction of tax liabilities• Increased satisfaction for
Business buyer (new owner) Customers Employees Suppliers
Introduction
Transition PlanValuations
Finance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success5
Good Planning Eases Adversity
• Owner illness• Divorce• Death• Disability• Litigation
Introduction
Transition PlanBuyer’s View
Valuations
Finance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success6
Business Viability Concerns
• Performance relative to benchmarks Revenues and revenue trends Income and income trends
• Expansion potential• Competitive advantages• Company background
Core competencies Company culture
• Owner dependence Is the owner the business?
Introduction
Transition Plan
Buyer’s ViewValuations
Finance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success7
Financial Concerns
• Price justification 3rd party valuation Return on Investment to buyer Payback periods in years
Introduction
Transition Plan
Buyer’s ViewValuations
Finance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success8
Business Valuation
• Financial statements are key EBITDA multiples Discretionary income multiples Cash and non-cash add backs Value derived from market data
Introduction
Transition Plan
Buyer’s View
ValuationsFinance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success9
Business Valuation
• Valuation checks Return on Investment to buyer Payback periods in years
Introduction
Transition Plan
Buyer’s View
ValuationsFinance
Organization
Operations
Marketing
Administration
Closing
We Transfer Business Success10
Financial Issues
• Report all revenues and income Accurate, complete, verifiable Audited financials are preferred Have good cost accounting system
• Change from bottom line minimization to profit maximization Mindset of a public as opposed to a private
business
• Have a recent business valuation• Tax planning to reduce taxes from
sale of business
Introduction
Transition Plan
Buyer’s View
Valuations
FinanceOrganization
Operations
Marketing
Administration
Closing
We Transfer Business Success11
Owners Role
• Delegate more effectively Reduce reliance on business owner Formal employee training
• Succession/Exit Strategy Employees related to owner Identify and groom a successor Mentoring of key personnel
• Succession takes time and effort Complex mix of potentially conflicting issues
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
OrganizationOperations
Marketing
Administration
Closing
We Transfer Business Success12
Partners and Employees
• Execute agreements with partners Buy/sell and buyout agreements
• Employee dependency Employee tenure/turnover Employee contracts 401(k) plans to keep employees Culture
• Human resource documentation Employee handbooks Job descriptions Personnel files
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
OrganizationOperations
Marketing
Administration
Closing
We Transfer Business Success13
Operational Processes• Policies and procedures
Processes Core activities Systems (consistency of quality, customer service) Equipment maintenance Procedures
• Technology and automation IT current Equipment up to date
• Streamline processes Evaluate each product or service to verify contribution to bottom
line Outsource non-core activities Analyze and outsource activities that can be obtained cheaper
on the outside
• Inventory control Inventory turnover relative to industry standards Review methods (FIFO, LIFO, etc.)
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
OperationsMarketing
Administration
Closing
We Transfer Business Success14
Suppliers
• Supplier relations Supplier/approval selection process Long-term contract benefits Owner dependent relationships
• Cost of raw materials Review frequently Renegotiate if necessary
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
OperationsMarketing
Administration
Closing
We Transfer Business Success15
Customers• Customer retention
Friends or relatives of owner Customer service and support Customer loyalty
• Limited number of customers• 80% of revenue concentrated around a
small group of customers• 20% of business concentrated with one
customer• Reevaluate Marketing/Sales
Direct Reps Agents Internet – new opportunities
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
Operations
MarketingAdministration
Closing
We Transfer Business Success16
Marketing and Advertising
• Marketing strategy/plan Advertising Trade shows Internet Brand awareness Clear and consistent message Differentiation
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
Operations
MarketingAdministration
Closing
We Transfer Business Success17
Competition
• Know your competition Use industry groups Ask your customers
• Know what they do differently Articulate your advantages and disadvantages Pricing strategy
• Learn from competitors Benchmark Borrow good ideas
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
Operations
MarketingAdministration
Closing
We Transfer Business Success18
Legal Issues
• Intellectual property is it secure Patent, copyright, and trademark applications
• Litigation issues Settle all litigation Resolve all product liability cases Resolve all insurance claims
• Form of incorporation pros & cons C-Corp S-Corp LLC Proprietorship Partnership
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
Operations
Marketing
AdministrationClosing
We Transfer Business Success19
Regulatory Issues
• Regulatory status Clear environmental compliance Have environmental review by reputable firm Review all permits and licenses OSHA issues Pending zoning issues
Introduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
Operations
Marketing
AdministrationClosing
We Transfer Business Success20
QuestionsIntroduction
Transition Plan
Buyer’s View
Valuations
Finance
Organization
Operations
Marketing
Administration
Closing