How the marketplace values a company

WHAT SELLERS NEED
TO KNOW
How the Marketplace
Values a Company

Definition of Fair Market Value
Copyright © 2016 www.colmengroup.com
2
Fair Market Value is defined as the price at which
shares of common stock of a closely-held
company would change hands, with both Buyer
and Seller having full information about the
company and neither party acting under any
compulsion to complete the transaction.

Factors That Drive Value
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Financial Factors (usually the most important factors)
 EBITDA (earnings before interest, income taxes, depreciation & amortization)
 Value of Assets (book and market value)
 “Clean” Balance Sheet (good & collectible accounts receivable, good & saleable
inventory, low debt to equity ratios, high working capital ratios)
 Audited or Reviewed Financial Statements (not compiled)
 Solid Financial Infrastructure (high level of “back office” automation & integration)
 Ability to Forecast EBITDA Accurately for 3-5 Years
 Growth Strategies in Place and Well Documented

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Proprietary Technology/Products
(Can Trump Financial Factors)
 Patents
 Sole Right to Manufacturer a Product
 Sole Right to Distribute a Product
 Protected Market Area
 Unique Manufacturing or Marketing Process
 Unique or Innovative Product or Service
 Superior Technology
 Industry Leader for Product

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Customer Base
 Diversity (no single customer more than 10% of revenue)
 Years a Customer (the longer the better)
 Written Contracts that are Transferrable (for at least a 1 year term)
 Financial Strength of Customer Base (no major customers in distress)

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Suppliers
 No Single Supplier Dominates Purchases
 Major Suppliers Can Be Easily Replaced
 No Major Supplier Is In Financial Distress

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Management
 Management Infrastructure
 At least one layer of Management beneath Owner
 Company not dependent on Owner’s daily presence
 Succession plan in place
 Resume Strength of Management Team
 10+ years of experience
 Proven Track Record of Performance

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Employees
 Low Employee Turnover
 High Skill Level of Employees
 Non-Union Employee Base (preferred)

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Competitors (compare company to competitors as follows:)
 Size
 Years Established
 Industry Reputation
 Strength of Product Line
 Pricing of Product Line
 Diversity of Product Line
 Unionized Work Force
 Level of Automation

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The Industry
 Barriers to Entry
 Industry Trends
 Size of Marketplace
 Position Within Marketplace

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Risks
 Environmental
 OSHA
 Litigation

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Timing (sell when):
 EBITDA is peaking but not too close to the crest
 EBITDA is sustainable
 Debt is low
 Technology is stable and not in transition
 Management contracts in place
 Economy is stable
 Industry outlook is good

VALUATION FALLACIES…
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 I can sell my Company for the same multiples as the
large public companies.
 Historic performance does not matter; my Company
will be priced entirely on future earnings.
 Companies typically sell for a multiple of sales.
 My industry/Company is different from other
industries/companies, so typical valuation techniques
do not apply.
 Timing doesn’t matter.

VALUE LOST BECAUSE…
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 Too close to the Company to understand its true value.
 Too removed from the M&A market to understand its pitfalls.
 Failure to:
 Effectively present the Company’s strengths and future
earnings stream
 Structure purchase price to obtain the highest after-tax value
 Develop a comprehensive database of potential Acquirers
 Identify, quantify and capitalize on the synergies created with
each potential Acquirer

SELLER MISCONCEPTIONS…
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 Only I can sell my Company. Nobody knows my Company
better than I do.
 Only companies in my industry can acquire my Business.
 I only need 1 or 2 potential Acquirers to complete a sale.
 I know what my Company is worth.
 Unrealistic expectations
 Different debt structure for Acquirer
 Different risk profile for Acquirer

SELLER MISCONCEPTIONS
(continued)…
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 I do not need to disclose confidential information about
my Company in order to sell it.
 My Company will sell in 6 months.
 My employees (customers/suppliers) will find out that my
Company is for sale and leave me.
 My relationship with my bank will change if they know the
Company is on the market.

The History versus Forecast Debate
(Do We Value a Company on Historic Performance or Future Performance?)
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The Acquirer’s Argument for History
 I will only pay for what you have done with the Company,
not for what I will do with the Company.
 Forecasts, no matter how diligently prepared, do not
reliably predict future performance.
The Seller’s Argument for Forecast
 I have positioned the Company to achieve the benefits
you will reap.
 I know my market better than anyone else, if I can’t
forecast my future performance then no one can.

The History versus Forecast Debate
(Do We Value a Company on Historic Performance or Future Performance?)
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The Acquirer’s Argument for History
 Historic performance is the only reliable indication of
value since it is based on fact not conjecture.
 Only Companies with strong market share are in a
position to forecast with any degree of reliability.
The Seller’s Argument for Forecast
 Historic performance is useful to establish trends, but the
Company is worth the sum of its history and its potential.
 My Company’s reputation has created its own unique
position in the marketplace.

5 Critical Points to Remember
When Selling Your Company
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1. Make your decision to sell very carefully and deliberately. If you
are not ready to sell your Company, DO NOT PUT IT ON THE
MARKET.
2. Position your Company properly before placing it on the market.
Your Company should be placed on the market just before it
peaks (not before and not after). Correct problems that could
jeopardize your sale.
3. Conduct due diligence on your Company before the Acquirer
does. Know your problem areas before the Acquirer discovers
them.

5 Critical Points to Remember
When Selling Your Company
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4. DISCLOSE ALL PROBLEMS to the Acquirer up front. No
problem is too big to resolve if it is disclosed at the beginning
of the selling process. No problem is too small to collapse the
negotiations if it is disclosed late in the selling process.
5. Do your homework up front. There are no shortcuts in the
selling process. The time you spend in the preparation
process, and the quality of that preparation process, will
largely determine your success.

5 Biggest Mistakes in
Selling Your Company
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1. Unrealistic purchase price expectations. Understand what your
Company is worth. Do not go through this process if you are
unwilling to accept a realistic purchase price.
2. Not understanding the tax implications of selling your Company and
your lifestyle needs post closing. Understand the after tax proceeds
of the sale of your Company and what you need to maintain your
lifestyle post closing.
3. Poor preparation (or no preparation) of the Descriptive
Memorandum. The DM serves the dual purpose of conducting due
diligence on your Company (before the Acquirer does) and providing
the foundation for the Acquirer’s Letter of Intent.

5 Biggest Mistakes in
Selling Your Company
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4. Not creating a market for your Company. A few Acquirers is no
Acquirers. Understand who is a potential Acquirer for your Company
and develop a comprehensive database of potential Acquirers in
order to optimize purchase price.
5. Not enough emphasis on Confidentiality. Do not tell anyone (other
than 3rd party advisors) that your Company is for sale.

5 Ways to Position
Your Company for Sale
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1. Understand the current market value of your Company.
2. Prepare a SWOT (Strengths, Weaknesses,
Opportunities, Threats) analysis on your Company.
3. Prepare a 5-year trend analysis on your Company.
4. Prepare a 5-year forecast for your Company.
5. Prepare a Business Plan that details how you would
grow your Company over the next 5 years.

How the marketplace values a company

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