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Common Valuation Mistakes- Selling a Business |
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Although rules of thumb can indicate a general range of value for your business, the results should be viewed with a degree of caution. There are a large number of additional factors which impact the value of a business. For example, the profitability of privately held businesses is often minimized to reduce tax liabilities. This may understate the initial value indication. In addition, rules of thumb are difficult to apply for growing businesses, because the financial picture is changing constantly. Other considerations include regional factors, market value of assets, competition, and intangible assets. Without thorough consideration of all factors, buyers and sellers alike are at risk of failing to maximize the potential of the sale or purchase of a business. We have listed a few of the more common factors that can easily be overlooked. We strongly encourage anyone interested in embarking on an M&A transaction to seek expert advice. Factors that can affect the value of a privately held business: The true profitability of a business in the eyes of a buyer (book profit adjusted for extraordinary expenses, excess owner's compensation, etc.) - Strong growth (using past performance as an indicator of future returns to the buyer)
- Competitive climate (market share of the firm, entrant of new players, substitution for Company's offerings)
- Regional/national economic climate
- Unique/proprietary products, data, processes
- Market value of the Company's assets (if the company is unable to attain the return on assets they should be getting, the value of the assets may be worth more to a buyer than the cash flow they are currently producing)
- Desirable contracts in place that complement a buyer's
- Synergistic value with a buyer
- Buyer may be able to attain a higher cash flow after purchase than the company as a standalone entity due to efficiencies
- Access to the Company's premier customer base may allow buyer to introduce their products/services to these customers as well
- Company's product line is a perfect complementary fit to the buyer's distribution channel
- Favorable lease terms in a desirable area
- Tax loss carry-forwards a buyer may be able to use to offset profits
- Advantageous supplier relationships that a buyer can leverage
- Rapidly changing industry dynamics
- Recurring nature of cash flow/financial performance
- Management's desire to immediately exit or stay with the business
Customer concentration By Bizquest
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