How to Sell Your Business, page 5

Strategic Versus Financial Sales, continued

Also, since financial buyers tend to be professionals who have bought numerous businesses, they may be able to move faster than strategic acquirers.

When planning your sale and/or dealing with a specific potential buyer, its important to understand in advance whether your business appeals on a strategic or financial basis.

To summarize, strategic buyers will pay a higher price (and in some cases will be the only possible buyers), but there are a number of issues that make handling the negotiation of the sales price and contract potentially delicate with some strategic buyers.

Where the assets you are selling primarily consist of technology, a strategic buyer is almost always the only option.

Understanding Valuation

Valuation is best thought of as an art (or craft) rather than a science. Ultimately, the value of something is what someone will pay for it. Think of this in the context of residential real estate: experts can do appraisals based on a number of criteria such as comparables. These appraisals have impact on the real world—for example, as evidence to support financing. However, the actual real-world price paid for your home will quickly likely be higher (and possibly lower) than the value indicated by an appraisal.

That said, it is important for sellers to understand valuation as practiced by third-party professionals for a number of reasons. Chief among these reasons, buyers will want supporting rationale for the asking price. Understanding valuation metrics will help you paint a story justifying a higher price. (On the other hand, if what you are thing of as the asking price is unrealistically high as a valuation, you should reconsider: the “too-high” price will likely kill the deal.)

In theory, the value of a business is the present discounted value of its future earnings stream. However, this is a deceptively simple statement. How do you know a business’s future earnings? The future is, by definition, unknowable. Many factors could arise that would change this estimation: changing markets, new competitors, injections of capital, etc. The best picture that can be painted here is of reasonable projection. If a business has audited financials showing five years of 12% annual earnings growth, then it seems reasonable (even if not always accurate) to assume future earnings growth of 12%.

Obviously, the value of the future revenue stream not only depends on its size at any given point in time, but also its growth (or lack thereof).

Continued next page

TOC || Page 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | More