Company Selling Prep within "6-12 Months"

1. First, substantiate the true market value for your business:
   Picking a number out of the air will be challenged. You can substantiate your price by establishing a "true market" value on your company assets, sales, cash position, and market.
   
   
2. Second, market your "value" to right segment of buyers:
   A buyer who has a clearly defined strategy why they want your business may pay a premium over your set price. Another buyer who is only interested in your company assets may be less willing to pay anywhere near the asking price.
   
   
   

1. Are your sales from repeat customers or are they one-time sales? The more repeat customers you have, the better.
   
   
2. Are your sales from a broad spectrum of customers? You have heard of the 80-20 rule, meaning that 80% of your business comes from 20% of your customers. Thisis typical for most businesses. The concern is when 95% of your sales come from 2-5% of your customers. What happens to sales if one of your major customers leave? Having a broad spectrum of customers increases your business value.
   
   
3. Can your sales be replicated? In other words, can you take your product or service and replicate the sales success in a different market or to a different target segment? If yes, your value goes up.
   
   
4. Finally, the buyer will want to know whether the sales will continue when you transfer the business over to them.
   
   If your business brand, product, customer contacts, etc., are dependent upon YOU BEING THERE, you must prep your business to carve yourself out of the picture. Your business will be more valuable if it is NOT dependent on you.
   
   

Prep your business by removing:

• expenses that are personal or non-business related:
  pay off company loans made for personal or non-business use
  
• expenses that do not produce income:
  analyze individual line items and pay-off or terminate service relationships for expenses that do not generate income

Also, prep your business by documenting:

• large expenses items that support the business operations or sales strategy
  
• expenses items that are part of your marketing strategy — show how your strategy impacted sales

• these buyers are only interested in purchasing equipment or assets that can compliment their current operations
• they will be shopping equipment at bargain prices
• they may have little or no interest in your markets or goodwill
  

	Pricing Strategy:
	•	the price they will pay is the market value of your equipment and assets — which is generally priced at its replacement value
	•	use this pricing strategy when you want to exit the business
	•	target the sale of your business to the competition or other-like businesses in your area

• there are buyers who are interested in a particular location such as a retail intersection or logistical handling (i.e., next to the airport).
• these buyers may or may not be interested in your assets, goodwill, or markets
• sellers in this situation generally own the building and land
• these buyers will either tear down or renovate your existing location

	Pricing Strategy:
	•	the perceived value is dependent on the macro-changes that are happening or expected to happen for that location
	•	the price they will pay depends on retail price of similar property in the surrounding area
	•	understand the potential use of your location. If your location is in a prime retail location for example, you may price your business and land at a premium
	•	you should get an independent land appraisal to substantiate your price

• the seller will have established contracts/sales in a geographic location or market to a demographic group where the sales barriers are high
• the buyer will have interest to move into an established market and ramp up their business quickly

	Pricing Strategy:
	•	the buyer's perceived value is dependent on the cost and time to establish a similar market or operation
	•	if the barriers of entry are high, meaning that the cost to setup and capture a similar market relationships are high, then your price could be somewhat high
	•	if the cost to setup a similar market is not high, then your price will be dependent on the buyer's perceived value of timing — how quickly they want to be in the market.
	•	understand the cost to setup a similar market. If that cost is high, then the perceived value may be high depending on your projected market position
	•	if the cost to establish a similar market is not high, then the perceived value is the strength of your documented cash flow position

• the seller will have a specialized or patented technology that cannot be replicated within a reasonable time or cost
• the buyer will be an established operation that can benefit from this technology

	Pricing Strategy:
	•	in most cases, the buyer would seek to license the technology and may not be interested in buying your operations
	•	the buyer's perceived value is the opportunity cost of not having the technology
	•	price the business and technology together with the technology piece the greater portion of the overall value
	•	the buyer may perceive the value as a great buy where they can take ownership of the technology and discontinue you as a potential hostage holder or competitor

• the seller will have a strong brand name in a defined market.
• the buyer will want to capitalize on the brand name to expand their marketing operations

	Pricing Strategy:
	•	the perceived value is dependent on strength of the brand name and the current operations or product line
	•	the value will depend on the brand — which can be subject to different opinions — and the value of your assets and earnings
	•	If you are in a position of strength — meaning that your cash flow position and brand recognition are strong — you can bump the price up.

• the seller has a business that is performing well with potential growth opportunities
• the buyer will be an individual who left the corporate ranks to look for an independent business opportunity

	Pricing Strategy:
	•	the buyer's perceived value is the cost to finance the business, set an annual salary for the themselves or another business manager, and maintain required capital expenditures
	•	the higher your cash flow position, the greater your market value
	•	price will be based on your cash flow position which can be 2-3 times over cash flow

Price is set at what the buyer will pay — it is not derived from any mathematical equation but rather as a psychological perception by the buyer.

The most accurate way to value a business and to substantiate your asking price is to complete a professional valuation. This is highly recommended if you intend to sale your business above book value.

Methodology to Valuation

The three generally accepted approaches used in determining the fair market value of a business is:

1. Asset Based Approach
   considers the replacement cost as an indicator of value
   
2. Income Based Approach
   measures the present worth of anticipated future net cash flows
   
3. Market Comparison Approach
   compares recent transactions of similar businesses that have been sold

The valuation may use one or more of the approaches above to determine value. It is completed by a professional appraiser using a database of similar valuations of like-businesses from around the country.

The process requires us to prepare the necessary documentation with a financial review of your financial records, operations, and marketing strategy. We will then forward that information to our internal valuation company. They in return will complete a valuation report within 5-7 days.

For more information, please call us:

1-703-319-1565

or click to our valuation page for more information

There are other reasons why you may complete an independent valuation of your business:

• for Lending Purposes: you may need a business loan or credit line. Many lenders will require an independent valuation of your business for lending approval
  
  
• for Getting Bigger: the valuation report can help you plan for a merger, acquisition, or stock offering
  
  
• for Employees: establishing and setting up employee stock ownership plans (ESOP) note: we have partners within our network that can help you establish ESOPs
  
  
• for Family Protection: provide information about your estate or ownership succession plan
  
  
• for Settlement Claims: determine asset/liability values for divorce or insurance settlements.
  
  
• for YOU: simply for wanting to know the worth of your company as you prep your business for an eventual sale
  
  

If you are unwilling to pay for a Company Valuation at the current time, use our simple but non-substantiated free business valuation formula to price a business:

	Pricing Formula:
	1.	Take the value of your assets minus your account receivables (the value should be after you have recasted your financials: see our financial note) Formula: Sum(1) = asset value - current acct receivables
	2.	Add your asset value to your 1-Yr. cash flow (use the most recent year's cash flow position) Formula: Sum(2) = asset value + one year's cash flow
	3.	Now take the cash flow and multiply it by 3 Formula: Sum(3) = one year's cash flow x 3
	4.	Add Sum(2) and Sum(3): Formula: Sum(4) = (asset value + cash flow) + (cash flow x 3)
	5.	Divide Sum(4) by 2
	6.	Add in the value of the accounts receivables Formula: Sum(5) = (Sum(4) / 2) + (Accounts Receivables) This will give you an approximate value of the business

Example:
Asset Value minus Accts. Receivables	$69,000
Cash Flow	$45,000
Accounts Receivables	$15,000
Step 1: Sum the asset value + cash flow	$114,000
Step 2: Multiply cash flow by 3	$135,000
Step 3: Sum Steps 1+2	$249,000
Step 4: Divide Step 3 by 2	$124,500
Step 5: Add back in the accts. receivables	$139,500
Approximate Value of the Company	$130,000-$150,000
Note: This is an approximate valuation based on asset value and cash flow position. A true value is derived by completing a professional valuation.

Another Example: Reverse the Cash Flow Value with the Asset Value
Asset Value:	$45,000
Cash Flow:	$60,000
Accounts Receivables	$15,000
Step 1: Sum the asset value + cash flow	$105,000
Step 2: Multiply cash flow by 3	$180,000
Step 3: Sum Steps 1+2	$285,000
Step 4: Divide Step 3 by 2	$142,500
Step 5: Add back in the accts. receivables	$157,500
Approximate Value of the Company	$150,000-$170,000
Note in this example that CASH is a driving determinant of value. The higher the cash position, the greater your value Note: This is an approximate valuation based on asset value and cash flow position. A true value is derived by completing a professional valuation.

Building Up Your Cash Flow

Increasing cash flow requires an

1. the increase of sales and/or
2. a decrease of expenses

Maintaining a steady flow of sales requires a supporting marketing strategy.

If your business has intrinsic value such as goodwill, established contractual relationships, prime location, or patented technology, you may set a value that equates the cost it would take for the buyer to replicate your value.

For example: if you have patented technology that would cost the buyer $YYY in development, the value of that technology would be priced at $YYY if the technology can be used in the going operations of the business.

If your business has contractual relationships that would take a buyer $ZZZ dollars to develop, the value of those relationships would be worth $ZZZ if those contracts can be transferred to the new buyer.

Setting these values can be tricky. We highly recommend that you use a professional valuation based on:

1. Income Based Approach
   measures the present worth of anticipated future net cash flows
   
2. Market Comparison Approach
   compares recent transactions of similar businesses that have been sold
   
   more information about company valuations
   

Asset valuation is less complex than market valuation. You simply price the company based on the replacement value of your company assets and equipment.

If you have specialized equipment that is not easily compared in value with other readily available equipment, you might consider a professional valuation based on:

1. Asset Based Approach
   considers the replacement cost as an indicator of value
   
   this will substantiate the asking price for your asset holdings — we have more information about company valuations
   

The pricing point from the buyer is whether the cash flow from the business will justify the purchase price for the business.

The basic formula is as follows:

	Cash/Pricing Formula:
	1.	Take the: owner's discretionary cash flow use a 3-year average
	2.	Reduce this by: Annual debt service: this will include the principal and interest payments for financing the purchase price of the business less the down payment ___________________ Owner or manager annual salary: the market rate for managing the business either as the owner or through a hired manager ___________________ Capital Expenditures: the amount that must be paid to maintain, service, and replace business equipment and other fixed assets. A good benchmark is to replace all operating assets within five years. Take the market value of the operating assets and divide by 5
	3.	Equals: Remaining Cash Flow: this amount needs to be positive to justify the asking price

Example:
Estimated Price:	$550,000
Buyer Down Payment (1/3rd):	$181,500
Financing Terms:	$368,500 10.0% 7 year note
Market Value of Operating Assets:	$35,000
Estimated Return on Down Payment:	5%
Forecasted Annual Cash Flow	$210,000
minus:  Annual Debt Service	$73,410
minus:  20% Debt Service Cushion*	$14,682
minus:  Owner / Manager Salary	$100,000
minus:  Capital Expenditures	$7,000
minus:  Return on Down Payment	$9,075
Cash Flow Remaining	$5,833
The asking price is justified in this example given the positive cash flow position after deducting financing cost, management salary, return on the initial investment, and capital expenditures. *Note: Standard cushion required by lenders when underwriting this loan. This amount is not an expense and would be an additional amount to cash flow.

Another Example:
Estimated Price:	$650,000
Buyer Down Payment (1/3rd):	$217,644
Financing Terms:	$432,356 10.0% 7 year note
Market Value of Operating Assets:	$35,000
Estimated Return on Down Payment:	5%
Forecasted Annual Cash Flow	$210,000
minus:  Annual Debt Service	$86,131
minus:  20% Debt Service Cushion*	$17,226
minus:  Owner / Manager Salary	$100,000
minus:  Capital Expenditures	$7,000
minus:  Return on Down Payment	$10,882
Cash Flow Remaining	($11,239)
By increasing the asking price another $100K with everything remaining equal, the cash flow position from the buyer's perspective is negative and does not support the asking price. *Note: Standard cushion required by lenders when underwriting this loan. This amount is not an expense and would be an additional amount to cash flow.

The lender is interested in two things:

1. Does the historical cash flow (and projected cash flow) cover the cost of financing with a 20-25% cushion in the event of economic or market turndown?
   
2. If in the event of a default, can the bank recover the financing by selling the company assets?

If the answer is "no" to question 1, the lender will not finance the deal.

If the answer is "no" to question 2, the lender may finance the deal if you (via the buyer) can demonstrate that the business is a growing entity that support increasing cash flow.

Lenders assume a lot of risk when financing business purchases. Their only security in the event of default is the operating and fixed assets.

Lenders will not lend on goodwill and brand equity. They are looking for a business that has been managed well, has a management plan in place to grow the business, and has a history of financials that support the projected earnings expected.