In "Business Valuation Mythology 101 – Part II", Eric Bosveld discusses three common myths sellers often believe when valuing their business: owner-benefit add-backs, growth projections, and potential post-acquisition synergies. The author advises all businesses pursuing sales to maintain clean financial records, provide realistic growth projections, and remember that potential synergies might not be reflected in the buyer's offer.
Eric Bosveld of B&A Corporate Advisors discusses a typical problem in M&A dealings termed as "The Perpetual Valuation Gap". This is when the owner's valuation of the company perpetually exceeds market-based valuation. Even after a business grows to the owner's initial valuation, they elevate their expectations. This can lead to failed selling attempts, deterring potential buyers. The most successful sales processes occur when parties reach a consensus on potential value before initiating the sale, coupled with proper preparation, professional marketing, and structured incentives for alignment between client and advisor.
This article by Eric Bosveld addresses common misconceptions in business valuation myths. It challenges beliefs that asset value equates to business value, arguing that cash flow drive value. Standard EBITDA multiples aren't reliable business valuation methodologies and enterprise value doesn't translate to equity value. Working capital shouldn't be added to business value as these constantly change. The author plans to address more myths in future articles.
Before putting a business up for sale, it may be important to divest redundant or non-operating assets that do not contribute to the business's core functions or cash flow. These can include real estate or inventory. Selling these separate from the business itself can complicate deals, but can also help achieve a better market value. This pre-sale divesting process involves thoughtful planning and expert tax advice to avoid tax implications, especially when it concerns sales-leaseback agreements.
Improving revenue quality - defined as profitable, sustainable, and predictable sales - enhances business value and marketability upon sale. High-quality revenue typically stems from contracted sales with recurring revenue, subscription services, and customer retention with low churn rates. Management tactics such as leveraging CRM systems and prioritizing growth with current customers can elevate revenue quality. While revenue diversity is beneficial, one must focus on the business's most profitable segments, products or services.
When selling a business, transparency with EBITDA addbacks is crucial as it impacts buyer's valuation perspectives. Unjustified addbacks might harm negotiation outcomes. It’s advisable to present accurate adjustments, ensuring clear justifications, before the buyer's due diligence process.
The cumulative impact of past capital expenditures (capex) decisions can significantly affect business value. Managers often neglect measuring the long-term effects of major capex. Good capex decisions can enhance business value and profits, while poor decisions can devalue a business. To build long-term enterprise value, it's crucial to have a return on capex higher than your weighted average cost of capital.
As businesses grow, their management becomes more complex, necessitating robust systems like reporting structures, strategy communication tools, and financial controls. Entrepreneurs must adapt, effectively delegating responsibilities to ensure growth without their involvement in every decision. This transition may include succession options or targeting breakthrough performance. Ensuring these systems and structures are in place can optimize business value.
Businesses can increase earnings without upping their enterprise value, highlighting that not all profit growth is beneficial. Value stalls when incremental earnings or profits don't surpass operational costs and capital cost. Value-enhancing strategies include increasing profits without additional capital, divesting parts of the business, or restructuring capital to lower overall costs. Disciplined profit growth that exceeds capital costs is typically rewarded by attracting more buyers or investors.