OK, so you have made the biggest decision of your professional life: You have decided that it is time to find a buyer for your business. For years you assumed that your children would carry on the legacy of the firm, but they have clearly told you that 80-hour workweeks along with all the risk inherent in running a family business do not interest them.
Your fallback was to then sell the company to your employees and retire on the future earn-out that the deal would provide. But after taking a long hard look, you realized that as skilled as your employees are, the downside financial risks for you are too great to “hope” that they could run the business as well as you have and provide for your retirement in the process.
So the optimal option, as you have determined, is to find a buyer who can grow and expand your legacy while also providing you with the capital you need for retirement.
The question now becomes: What to do next? The answer is to hire an experienced M&A advisory firm that can perform a thorough and complete evaluation on your company. This is vital before entering the market.
Of course you can do this on your own if you are well versed in the practice of “recasting.” If you have not heard of this term, or if you are not sure what it entails, I highly recommend hiring a professional firm do this for you.
Recasting is the accepted accounting principle of removing or adjusting items on your financial statements that are unrelated to the ongoing business. You have probably worked hard over the years with your accountants to under-report your earnings for tax purposes. This is perfectly legal and acceptable. But it understates the true value of your company.
Keep in mind one key principle of the selling process: Professional buyers are buying your future, not your past. The only way to accurately highlight your future profitability is by recasting your historical financials and then projecting out three to five years using the new recast baseline as your starting point.
Items removed or adjusted via recasting can be superfluous, excessive, or discretionary expenses and nonrecurring revenues and expenses. The recasting process can be quite time-consuming and tedious. The person providing the service will ask you lots of questions and will dig deeply into your historical financials to find as many legitimate recastable items as possible.
Again, buyers are buying your future and will base their offers on what they see in your financials. So if they are not recast accurately, your base year could understate your profitability, impacting what buyers will pay for your company.
Case Study: For example, let’s assume a buyer is looking at two similar companies in the same industry. Both are generating similar levels of revenue.
Which of these companies do you think will receive a better offer? Assuming that there are no extraneous issues affecting Company B, it will most likely generate better offers than Company A. With this example, you can see how vital recasting is in protecting you from offers that are too low.
Caveat: Our discussion of recasting presumes your financials are in good order and follow GAAP (Generally Accepted Accounting Principles). If not, you need to start there and get your financials cleaned up as we discussed earlier this week. If not, no matter how carefully you document your recasting, your actions could be based on inaccurate financial information.
As I mentioned earlier, it is possible to produce an evaluation of your firm on your own. If you have an accountant that is experienced with recasting (many are not) and if you have the time to spend not only analyzing your business but also objectively documenting your growth opportunities, you could produce your own evaluation document.
However, having done the recasting, the question now becomes: How do you determine the value of your company? This is where it becomes critical to have the services of an experienced M&A advisory firm.
You may be aware of standard “multiples” for your industry, and sometimes these can be quite accurate. But again, professional buyers are buying the future. This means that they will project your recast earnings into the future and then will “discount” them back into today’s dollars using a discount rate that matches their internal rate of return for comparable investments like yours. The “discount rate” is based on a variety of factors including risk, stability of the investment, believability of the projected revenue growth, etc. This is where it really gets complicated.
Ultimately, a number of methods need to be analyzed to accurately value your company. In addition to the discounted cash flow analysis, other methods that can be used are industry comparables, rule of thumb multiples, asset-based valuations, preceding transactions, etc.
Each method has its strengths and can be used alone or in conjunction with other methods depending on your business. Unfortunately, time and space do not allow me to delve deeply into all of the valuation methods used. Suffice to say, this topic could be several future articles alone.
The bottom line is this: The valuation of your company sets the benchmark for where you will expect offers. If it is not done accurately, you could be undervaluing your company, placing your expectations too low. Conversely, you could also over-value your firm and end up with expectations that are way too high.
These are things you can avoid if you obtain the services of an experienced M&A advisory firm at the outset of this process. Be sure to contact firms that will not only value your firm but will also stand behind their valuation and represent you in the market. This really is key. Lots of firms will value you, but if they are unable to represent you in the market, how legitimate is that valuation?
Once you have developed a “buyer ready” business and have decided to sell, make sure that the valuation is done accurately. Don’t skimp on this step and try to save money by hiring a firm with less experience. The old adage is true: You get what you pay for.
Generational Equity has been valuing and selling businesses for years. Our team of financial analysts and evaluation managers is second to none in our industry in terms of experience and skill. Their abilities are matched by our deal-making teams that have proven over the years that they can effectively close deals. If you are interested in talking with us about your company and its valuation options.
No matter who you ultimately use to value your company, be sure to work closely with them during the process and ensure that every possible recast is identified and documented. In the end, when the deal closes and you achieve your financial dreams, all the hard work during the evaluation phase will have been worth it.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2012 Generational Equity, LLC All Rights Reserved
The information we learn from customers helps us personalize and continually improve your experience at gencm.com. Here are the types of information we gather.
Information You Give Us: We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice. Our computer system protects personal information using advanced firewall technology.
Information from Other Sources: For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Capital Markets LLC may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Capital Markets, L.L.C. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Capital Markets LLC at is office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
INFORMATION ON THIS WEB SITE IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Capital Markets may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Capital Markets does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Capital Markets will be deemed NOT to be confidential. By sending Generational Capital Markets any information or material, you grant Generational Capital Markets an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Capital Markets is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Information Generational Capital Markets publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Capital Markets intends to announce such products, programs or services in your country. Consult a Generational Capital Markets representative for information regarding the products, programs and services which may be available to you.
Generational Capital Markets makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Capital Markets web site, please understand that it is independent from Generational Capital Markets, and that Generational Capital Markets has no control over the content on that web site. In addition, a link to a non-Generational Capital Markets web site does not mean that Generational Capital Markets endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Capital Markets BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Capital Markets.
Honored to win Investment Banking Firm of the Year 2 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.