How to Sell Your Business, page 7

Understanding Valuation, continued

Yet another metric is value of tangible assets owned by your business less liabilities. A business should never sell for less than the net proceeds that could be generated by an asset sale.

The reality for most sellers is that they start thinking about a transaction with a back of the envelope calculation in mind. “If I have $X to pay off debt associated with the business, and $Y to pay for my new life style living the life of Reilly in the Caribbean, I will be a happy camper. Therefore, my business should sell for $X+Y.” (Note that, at least with small businesses, bank debt often must be paid off at a sale, with the new owner responsible for refinancing.)

This “magical thinking” is responsible for most of the businesses listed for sale that do not sell. As with real estate sales, it is a bad idea to start with an unrealistically high price, coming down over a long period of time. Businesses sold this way get marked as “stale.”

When the seller has a realistic price that is consistent with comparable sales in the industry, and that can plausibly be justified using valuation metrics based on free cash flow and revenue, then a business is very likely to sell.

Most small business sales involve some seller financing. Generally, the more money down, the lower the total price. Sellers should realize that price is only one variable in the total package of selling a business. They should try to look at the deal from the buyer’s viewpoint. What would work for a buyer? If the financing for a deal is unrealistic, then it is unlikely to work to the seller’s benefit in the long run (contingent and subordinated payments to the seller will not be made). So another answer to the question of business valuation is: what can the buyer afford?

Difference Between Financial and Strategic Valuation

Strategic buyers have reason of their own for buying your business. They may care about your financial valuation, and quibble about the metrics used, but this does not constitute the basis for the sale.

To get the highest price possible in a strategic sale, it is important to understand clearly the buyer’s motivation. Once this is understood, you can calculate the value to this buyer and set a price accordingly.

Valuing Technology

Technology companies, such as software or Internet businesses, rarely have tangible assets or cash flow streams to sell. Instead, intellectual property, such as patents and software code, is being sold.

By definition, selling this kind of business becomes a strategic (rather than financial) sale.

Continued next page

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