Archive: Business & Technology

In last week’s article, I stated that a well-designed succession plan allows a business owner to pre-determine not only the destiny of the business, but also his or her personal destiny.    Today I will begin sharing information that may helpful to understanding why that is so.

Every business owner will exit his or her business at some time.  Some will do it with panache, and move on to either retirement or another venture, others will die at their desks. When business owners plan far enough in advance for their exit, their options provide the best opportunity to define and achieve their goals.

While most of you reading this article probably have plans in place to provide in the case of possible disability and inevitable death, at the very least in the form of wills and insurance, only 22% of business owners surveyed in 2005 by Pricewaterhouse Coopers reported having planned for their exit from their business – an activity that should be both voluntary and profitable!

So how does one go about developing a succession plan?  An expert at business planning will say the exit strategy should be included in the business plan before the company even gets off the ground!  But if that hasn’t been the case, the first step should be to determine the value of the business.  That is, what an able and willing buyer would pay for the business in the current marketplace. Of course, a good advisor will also take business owners through a rigorous examination of their values, to learn about how they want to live into their maturity, so they can plan effectively to realize their dreams and desires.

A business valuation takes into consideration qualitative as well as quantitative criteria.  It isn’t as simple as using a rule of thumb multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) or cash flow.  For example,  the value of a highly profitable company with only two customers is significantly discounted for obvious reasons.  Also, if the owner of a company is paramount to its brand, or is the only link to the customers, that also can negatively impact its value to a buyer.  These are examples of qualitative factors that impact a company’s worth.  Conversely, unique intellectual property can positively affect a company’s valuation.  It takes a seasoned expert to correctly determine the weight of qualitative factors in valuing a company.  The quantitative criteria are derived from the company’s financials, typically from the past 3-5 years.

There are several business valuation modalities, and again, it takes an expert to determine which type to utilize.  Also, a valid business valuation typically reviews the business through several chosen modalities, comprehending those best aligned to the evaluate the business’s performance.  For example, a selling price of a business in distress may be determined by different asset-based valuations.  A highly profitable business would be valued using discounted cash flow, among other, methods. 

By whom may a business owner have a valuation prepared?  Mergers and acquisitions specialists, investment banking firms, and accounting firms with in-house mergers and acquisitions specialists, are the best sources for business valuations for determining fair market value.  Of course, you may check our website  www.integratedbv.com to learn about our valuation services:)   Beyond a valuation to determine a fair market price range for a business,  there are a myriad of other, more complex valuations that must able to be upheld in litigation.  For these purposes, it is essential to consult a certified valuation analyst, many of whom are also accountants.

Why a business valuation as a first step?  Many business owners have a significant amount of their personal assets tied up in, or collateralized to, their business.  Given the rapid decline in the financial markets, the amount of equity available from the business may be essential to their retirement, or to a lifestyle they developed as business owners, and prefer to maintain. 

Of course, a review of one’s personal assets and involvement of a financial advisor may be warranted either at this stage, or once the business valuation is completed.  Also, an attorney specializing in estate planning may be important to this process.

Conversely, if  business owners find, through the information gleaned from the valuation, that the company is not actually worth what they assumed it to be, and its current value will not support their future plans, they have the fortunate ability to do something about that.  Growth planning provides opportunity to shore up the company’s financial performance and profitability.  This can be done either organically or through acquisition, and with the aid of outsourced advisors.  If your company is large enough to support a corporate CFO, and the company has been underperforming financially, it is time to find a more capable executive, and to thoroughly analyze all aspects of your business.

Next week I’ll address the importance of clarifying one’s intentions about one’s future in regard to the exit planning process.  Stay tuned!


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