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M&A POLL

Will Business Values Increase Over Next 12 Months?

Substantially - 10%
Moderate - 31.4%
Stable - 30%
Decrease - 24.3%
Plummet - 4.3%
The voting for this poll has ended on: 06 Mar 2012 - 21:24

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M&A BEYOND BUSINESS BROKERS

Princeton is Remaking the Way Businesses are Bought and Sold

The Importance of Good Advice when Selling your Business or Buying a Business cannot be overstated.

We know, we have been on both sides of the transaction in the past. The process can be very frustrating and inefficient if not handled correctly. Worse yet, it can wind up in a lose-lose transaction in which neither the buyer nor the seller realize their goals.

Even a minor percentage difference in price can mean a significant amount of money. Most business sales do not realize their maximum value for sellers or buyers for many reasons. Advice from a qualified M&A intermediary with experience can help you avoid mistakes such as:

  • tax ramifications
  • Keeping the Sale of the Business Confidential
  • Understanding the Best Structure for both parties

Princeton is not your typical Business Broker - we are Merger & Acquisition Intermediaries that act as Investment Bankers for your business, utilizing a proprietary system which matches you with the most valuable opportunity for your particular goals.

Princeton is different from a typical Business Broker because we have an experienced team of business brokers and Merger & Acquisition specialists (M&A) to help you get the most value by using customized processes that are typically found in larger investment banks throughout the CT, NY and entire tri-state area.

Princeton will reduce your headaches and stress by giving you an experienced M&A intermediary that you can rely on for professional advice throughout the entire process.

If you are considering selling your business, or just looking at various exit strategies, our process assures you that you will get the most value for your company. Princeton is only compensated after a successful sale of your company.

Call us know whether you are looking at retirement, or a succession for your business.

Please leave your contact information so that we can understand your goals, and begin helping you TODAY!

 
BUSINESS BROKER QUOTED ON CNN

Princeton Capital Strategies Quoted M&A expert quoted on CNN's Money regarding the State of the Business for Sale Marketplace

CNN recently turned to Princeton Capital Strategies for an expert opinion on the marketplace. Please read below.

http://money.cnn.com/2009/04/27/smallbusiness/small_biz_sales.smb/index.htm

 
SELLING A BUSINESS

Strategy + Process = Success

Imagine the Satisfaction of Knowing you Received Maximum Value for Your Company

Princeton Capital  is a boutique M & A advisory firm that specializes in earning sellers a premium for their businesses when selling or divesting. We work with Business Owners to maximize the value of their business through an effective exit strategy that maximizes the value to the business owner or shareholders. Business owners may maximize their benefit from a business sale from a strategic sale of the business, a Management Buy-Out, a merger, or many other strategies.

The question is, which strategy is best for you and your shareholders?

You want to maximize the selling price, but How? There are two Buyers will value a company based upon the future earnings they will earn from the company, and the company’s assets. Princeton Capital has a 3 step process built to maximize the valuation buyers will put on your company, and the return to the shareholders of the seller, that starts with 1) uncovering and marketing all a company’s valuable assets, 2) marketing the company and those assets to the companies and funds that will value them most, and 3) using our experience to maximize the return to the shareholders through effective negotiations, tax strategies, and deal structures.

You want to maximize the actual dollars you receive. There are many examples of business owners who sold their business but

How Princeton Developed the System that Worked

Princeton was built based on its founder’s “less than positive” experience in over 20 years of starting, buying, and selling small to medium sized businesses.  We know firsthand how difficult it is to succeed with a small business, and how difficult it is to execute a proper and efficient exit strategy.  We believe Small Business Owners deserve the maximum value for their businesses, and the assets they have built over the years.

The importance of obtaining maximum value, and achieving a successful sale of Your Company, is not only important to you but also important to the American way of life.  Achieving the “American Dream” means your business has brought economic strength and innovations that affects the lifestyle of many Americans.  Realizing the fruits of your labor and risk, and transitioning your company properly so that it can achieve the next level of success, is extremely important to make certain small businesses continue to thrive.

To achieve the final pinnacle of your success is typically not an easy process.  In our past experience, we found that most business owners were not as successful with this final stage of their American Dream.  This is not just hurtful to the business owner who leaves money on the table, but also harms the ability for someone else to continue or start their own American Dream.

 
BUSINESS VALUATION FROM AN INVESTOR'S PERSPECTIVE PDF Print E-mail

Look at the Buyer's Alternatives to Find the Real Valuation of Your Business

Abstract

No one can tell you exactly what your business is worth except for someone ready, willing and able to buy or invest in it. But, with that said, by looking at your business from the perspective of a business buyer or investor, and their alternative investments, you will be able to see how much your business is worth.

 

M

 

ost every business would like to know what the real value of their business is. The truth is an accurate answer can only be found out through an exhaustive process of selling your business or trying to raise funds. Traditional standard valuations do not really provide a true value for a small business, mainly due to the subjectivity involved.

With that said, you can get close. In order to get as close as possible to an accurate valuation of your business, sometimes it is best to forgo the traditional business valuation template, (which in most cases is fairly useless,) and instead put together multiple scenarios that will help you to understand the value of your business to a buyer as compared with other alternative investments or assets the buyer is considering. This exercise will have an added benefit outside of understanding of your company’s value, by also helping you to understand what you should focus on in order to make it more valuable in the years to come.

Just like you make an investment, buyers will be looking at buying your business versus alternatives. High Net worth investors will look at your business objectively as an investment or source of income. Strategic buyers will have a choice of buying your business or trying to grow organically. Or let the competition buy the company and spend the money on marketing. We will look at each buyer type, and how they will look at your business.

The majority of small businesses exit through a sale, and therefore one of the best ways to put a value on a business is to determine the price someone will pay for your business. In that respect, a lot of the information below will be with relation to selling a company.

Passive Investors

Passive investors are those that will not participate in the day to day operations of the business. These might be high net worth individuals such as “Angel Investors”, small funds, or possibly a financial institution. The value they will put on your company will be based on two characteristics:

1. What return can they get from the business?

2. What interest do they have in the industry?

These investors will typically have investment portfolios that contain a wide range of investments, from assets such as stocks, bonds, real estate, commodities, to other business opportunities, charities, etc. Each of these instruments will have an expected return associated with it, and the principle rate of that return is based on the risk of that particular instrument.

When you are seeking an investment from this group, you are really competing against other investments they would like to make. In other words, they are going to invest this money, is it going to be purchasing stocks, real estate, or equity in your company? To understand the value of your business, you need to look at these other investments as your competition, and compare the rates of return for these alternatives and compare them to the rate of return on an investment in your company.

Although this is not a pure science, the rate of return on a $250,000 investment could be described as follows:

 

Instrument

Rate

Risk/Liquid

Investment

Expected Value - 5 yrs

Government Bond

2.7%

No risk/illiquid

$250,000

$285,622

Bank CD

3.0%

No risk/illiquid

$250,000

289,818

Stocks (taxes deducted)

5.5%

Some Risk/liquid

$250,000

$314,163

Real Estate

(income producing – no leverage)

10%

Little risk.illiquid

$250,000

$375,914

Aggressive Growth Funds

12%

Risk/

$250,000

$406,301

Angel/Strategic Investor (50% of equity)

15%

High/non-liquid

$250,000

500,000 (assuming $1 million value)

Outside Investor (50% of Equity)

32%

High/non-liquid

$250,000

$1,000,000 (assuming $2 million value)

 

Let’s try to use the above chart in an example. Let’s assume you are trying to raise $250,000. In your chart, you are projecting approximately $230,000 in earnings in 2012. Let’s assume 5 years is 2014. The business will need to be worth $2 million by that time.

There are a couple of items to keep in mind.

Every investor will beat up your projections, and chances are they will knock them down.

The exception to this rule is the Angel or Strategic Investor who understand your business, or would like to add substantial value to it. They are in it for more than just a return on their investment. They enjoy working with small companies. It is very difficult to find angel investors, and hard to determine what value they will put on the company, since it typically not an objective calculation.

Most companies are valued based on a multiple of earnings. Let’s define earnings as the amount of cash someone from the outside would see come to their benefit assuming they were able to take over the business and run it themselves. So you would add health insurance, car payments, taxes, etc back to the earnings to make it higher.

For a business with “average” risk, most buyers will value the company based on a number that is (arguably) 3.5x’s the “adjusted earnings number”. (more on this multiple below) Therefore by the date you are thinking of realizing your “goal” valuation number you have to make sure that your earnings are that goal valuation number divided by 3.5. If you compare this to the chart above, I believe you will find the logic behind this multiple makes sense.

You will face an enormous amount of scrutiny if you are presenting a sudden increase in your earnings to an investor to justify a higher than 3.5x’s multiple valuation, so be careful. You will need to back up any number you put in front of a potential buyer or investor with concrete evidence and facts.

 

Institutional Investors and Funds

 

A typical venture capital company will look to make a tremendous multiple on their investment, because you have to pay for the failures they invest in and they can still have a 20% return to their investors. Therefore, they will typically look for an annual return of 40% on any of their investments. In addition, they want to know they have a rock solid exit within five years, whether through the public markets, an industry consolidator, or a Private Equity Fund.

Institutional investors will only be interested above a certain revenue level, and knowing that there is a clear and predictable liquidity event as an exit. Private Equity companies will not invest in any company that has less than $1 million in EBITDA in the vast majority of cases. The Public Markets are even worse, where you typically need $3 million minimum in EBITDA to make it worthwhile.

 

Strategic Acquisitions

 

This is very difficult to estimate, since strategic acquires can be interested in a business for so many different reasons. They are almost always the investor or buyer type that will give you the highest valuation for your business. This is for a number of reasons, including:

  • Lower risk since they understand your business, or at least the industry
  • Potential synergies since some of the business functions are probably redundant
  • Do not want your business to fall in the hands of another competitor, especially a well-funded or aggressive one that might cost them substantially when competing with them

What a Multiple of Earnings Means

The multiple is the amount multiplied by the earnings or the revenue that will compute to the price. In other words, if you were to use a 3.5 multiple of earnings, and the business is earning 100k, the price paid for the business will be $350k. If you are using a 0.8 multiple of revenue, and the company has $1 million in revenue, the price for the company will be $800k. The question is what multiple will an acquirer put on your business? As discussed above, it is mainly determined by risk. Unfortunately there is no concrete formula or absolutely definitive answer since no two businesses are alike. This subject will be discussed in other articles.

Conclusion

Your business is an investment to a potential buyer or other. You need to look at other investments as your your competition in order to understand your value. By putting yourself in their shoes, and asking the question about how much you would be willing to pay for your business, you can begin to determine the real value of the company.

Disclaimer

The Information Presentation Is Provided "As Is". Princeton Capital Strategies, Llc Does Not Warrant The Accuracy Of The Materials Provided Herein, Either Expressly Or Impliedly, For Any Particular Purpose And Each Expressly Disclaims Any Warranties Of Merchantability Or Fitness For A Particular Purpose.

 

 
BUYING A BUSINESS

Buying a Business

Princeton works with business acquisitions of all types, from high net worth individuals who are looking to acquire a business for income growth, to companies seeking business growth through strategic acquisition.

 

The most important consideration is your needs. You must define your goals.

 

  • Princeton will utilize this information to give you as many, or as little, opportunities as you would like.
  • Princeton will customize a list of opportunities for you that match your criteria.
  • Whether International or Domestic, we have a unique database of buyers you will not find elsewhere.

 

If you are an individual seeking a business to replace or supplement your income, please visit our page on Increasing or replacing income through a business

For companies seeking to purchase a business for growth, please visit our site Business Growth Through Acquisitions

 
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