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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 Home -> EXIT STRATEGY

Exit Strategies

EXIT STRATEGIES FOR BUSINESS OWNERS



BETTER VALUATION FOR YOUR BUSINESS THROUGH HIGHER REVENUE OR HIGHER EARNINGS?

Mergers & Acquisitions – Better Valuation for your Business for Sale from Higher Revenue or Higher Earnings

When an M & A advisor, investment banker or a business valuation company determines a value for a business for sale or acquisition, they consider multiple factors.  But, the most important factor the business M & A intermediary will utilize when valuing the acquisition is the financials of the business for sale.  How do you make your financials more attractive to a potential acquirer?  Are your decisions affecting your Exit Strategy for your business?”  Most M & A advisors will tell you that it is all about profit, the more you make, the more you will get for your business for sale.  The facts do not support this myth.

A critical trade off with many product lines, customers, or strategies is the age old revenue vs. margin argument.  Is it better to start a product line which will increase revenue and have a detrimental effect on your profit margin, or is it better to take on a large customer, even though they demand a steep discount on your products?  For the purpose of this article, we will ignore the effect of this decision on the daily operation of your company, and focus solely on the effect of this decision on the value of your business as you prepare for a business sale.

The answer is clear. Revenue wins.  The effect of higher gross sales will have a greater effect as you go to sell your business, versus the detrimental effect on the value of your business which will come from a lower margin percentage.

Princeton Capital determined this by compiling information from a variety of sources, including Pratt’s Stats.  Princeton utilized the most important financial metrics, the multiple of Revenue to the Sale Price, and the multiple of Earnings to the Sale Price.  These multiples are computed by taking the sale price and dividing it by the amount of earnings or revenue.  For example, if a company sells for $10 million, and has an EBITDA of $2.5 million, that company sold for a 4x’s multiple of EBITDA or had an earnings multiple of 4.  If that same company had revenue of $12.5 million, and sold for $10 million again, the company sold for a 0.8 multiple of revenue (10 / 12.5), or had a revenue multiple of 0.8.  We aggregated information from business sales and broke the results down by a range of revenue amounts, and a range of EBITDA amounts.

The businesses sold in the lowest revenue range received a value based on a multiple of Selling Price to EBITDA (earnings multiple) of 3.81 for their businesses on average.  For the highest revenue range, the businesses were sold for a value that was equivalent to a 6.99 earnings multiple on average.  Princeton then categorized the businesses in the same revenue ranges, and determined the value they received based on a multiple of Selling Price to Revenue (revenue multiple).  The revenue multiple for the lowest range was .47, and the revenue multiple for the highest range was .55 on average.  We then took into account the decrease in profit margins as these businesses increased in revenue.  The profit margins for the businesses in the lowest range averaged 12%, and the higher range had average profits of 5%.

The results show that the increase in revenue has a much greater positive effect on the valuation of a business for sale then the negative effect from loss of profit and profit margin.  The revenue multiple increased by 83% from the lowest category to the highest.

What does this mean to my business?  When making decisions about a new product, service or growth strategy, you should value increased revenues over decreased profit margins.  For example, if your company has annual revenue of $4 million, all else being equal, according to our study your company will be valued based on a earnings multiple of 4.8 and a revenue multiple of 0.47.  Assuming your company has the average profit margin of businesses in that revenue range of 8%, your company is earning approximately $320 thousand per year.  Therefore your company is worth $1.88 million based on revenue, and $1.53 million based on your earnings, or approximately $1.7 million.

In one scenario, you can begin producing a new product or service that will help you maintain your profit margin, and increase revenue by $1 million.  Utilizing the above, your company is now valued at $2.13 million.  In the second scenario, you decided to take revenue over profit margin.  You went with a product that earned only 4% margins, but had an additional $2.0 million in revenue, making your businesses average margin 6%.  The additional revenue puts your company into the next revenue range, and you will be valued at higher multiples.  Instead of your business being worth $2.13 million, your company is now worth approximately $2.9 million, a 36% increase!

product-comparison

revenue-decision

The moral of the story is, go with revenue over margin to get a better value for your business.

We would love to hear your thoughts – please go to http://www.princetoncapitalllc.com/valuation-articles

 
WHY DO I CARE ABOUT AN EXIT STRATEGY? PDF Print E-mail

Exit Strategies – why should I care? Two positive notes to answer that question.

We all agree that one way or another, a business owner will one day leave their business. Many owners do not fully realize the difficulty in selling a business. Most surveys confirm that only about 50% of the businesses for sale under $5 million in revenue actually sell.

You can point the finger at many causes for the high number of businesses for sale that do not sell. Most companies do not take advantage of resources such as businessesforsale.com, and therefore miss out on many willing and able buyers. Other business owners are stubborn, and request onerous terms that do not make sense to any buyer.

But, truth be told the number one cause is the lack of a plan. Selling a business or transitioning a company is much different then selling real-estate, a service, or a product. There are complex issues such as employees transitioning to the new company, customer relationships, proprietary systems, etc.

Studies show that although the vast majority of business owners plan on exiting their business within the next five years, less than 20% have a plan to do that. Business owners have a perception that they there is an efficient market for businesses such as theirs. For the most part they ignore the risk that will be imparted on the next owner, since they are accustomed to business as usual. They underestimate the length of time it will take for them to transition their business.

There are two positive notes to this

One, many of these characteristics that will make the buyer squirm and diminish the value of your business can be diminished if you have adequate time. And two, diminishing these issues does not just help with the sale of the business, but also with the ongoing success of the business itself.

Business owners should focus on locking up customers and employees long before they think about selling. This can be done through long term contracts and incentives. Business owners that focus on working “on” the business, and less “in” the business will not just make it more appealing to a buyer, but more likely the business will grow. Business owners that organize procedures and models will protect themselves from unforeseen circumstances, and greatly reduce the hassle of transitioning whether to a new owner or to replace an employee.

 

 
FAIRFIELD CAPITAL TO PRESENT AT EXIT PLANNING

Fairfield Capital Presenting at Exit Planning Exchange

The Top 10 Things Every Business Owner Must Know Before Their Exit

Not planning adequately to sell your business, or to efficiently transfer the business, will have a substantially negative impact on the valuation of your business, and the amount of value that you keep personally. The Exit Planning Exchange, Fairfield Capital, Action Coach, Michael Knight and Brody Wilkinson team up to present the top 10 things every business owner must know before their exit.

According to a Mass Mutual survey nearly a third of business owners do not have an exit strategy, and almost all plan to exit in less than five years. The lack of planning can cost them upwards of 30% of the purchase price, and increase the possibility the company will not sell at all.

 

Come Learn the Best Way to Prepare your Company

Ridgefield, CT – May 5th, 2010 – The Exit Planning Exchange, Fairfield Capital, Action Coach, Michael Knight, and Brody Wilkinson will join forces to present the top 10 things every business owner must know before their exit to help business owners in the CT & NY area.

Fairfield Capital will be part of the distinguished panel to discuss the things that make up the Top Ten Strategies of a Successful Exit. Discussion on the top 10 strategies will include such things as number 2, quantifying the after tax dollars, and number 4, How to assemble your dream team.

The conference is for M & A advisors, business brokers, accountants, attorneys, consultants, business coaches and other strategic professionals who can help business owners maximize their business valuation. Attendees will learn the tangible steps you need to take now to assure you will get the maximum value for your clients when the time is right.

Business owners who successfully exited wished they had started the process earlier for two reasons.
1. They could have received substantially more value for their companies.
2. The delay or procrastination made the process unnecessarily difficult.

Understand the Valuation Buyers will give to your client’s business!

To register and receive this report for free contact Fairfield Capital at 203-431-1600, email This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit us on the web at www.fairfieldcapital.com

“It is hard to believe how much money people lose by not adequately planning for their exit from their business.” claims Ken Ducey, President of Fairfield Capital. “We will give business owners concrete steps that will increase their company value,” Ducey continues.  A survey shows that 75% of business owners who have successfully sold their companies wished they had begun preparing for that process much earlier.

The Seminar will be held at the Westport Arts Center on Wednesday, May 12 at 7:30.

Fairfield Capital assists business owners seeking to exit or sell their business with a proprietary and custom process proven to obtain maximum value with the greatest amount of efficiency.

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EXIT STRATEGY

Exit Strategies for Small and Medium Sized Businesses, why are they Important?

We are Business Brokers here in the CT NY area that help a lot of business owners develop and execute on an Exit Strategy.  The biggest question we are receiving right now is, "is this a good time to develop and exit strategy?"

The quick answer is "Yes", it is important to develop an exit strategy as early as possible, even when you are starting your business.  The simple truth is there are many ways to make your business more valuable that are not that difficult.  You could develop long term employee contracts for your key employees, enlist some type of annual service agreements for your customers, document or register proprietary trademarks, patents, or other intellectual capital.

Times like these make it even more important.  Fact is, right now might not be the right time to sell.  Let's say you are in the construction business.  Most construction companies did not have a good year last year.  That translates to a buyer who will look to pay you a price based on a multiple of those depressed earnings from last year, even though your company could turn around tomorrow, and begin making earnings consistent with your historical profits.

Hopefully you don't have to sell immediately.  But, you should take this as a wake up call.  Some companies in your industry actually increased their revenue in 2008.  They will demand a primium for their business  for sale.  What did they do differently?  Were they specialized?  Did they have more diversification across their customer base or industry segments?  Do they have long term contracts with their customers?  Are they low cost suppliers of their service?

The key is to look at your business, and try to set it up in such a way that the business has consistent earnings.  Business buyers pay a large premium for consistency.  The turtle wins the race, not the rabbit.  When you go to sell your business, you will be paid a premium for relatively small growth, vs. huge gyrations of large growth and flat years.

 
IS NOW THE TIME TO DEVELOP AN EXIT STRATEGY FOR MY BUSINESS?

We are Business Brokers here in the CT NY area that help a lot of business owners develop and execute on an Exit Strategy.  The biggest question we are receiving right now is, "is this a good time to develop and exit strategy?"

The quick answer is "Yes", it is important to develop an exit strategy as early as possible, even when you are starting your business.  The simple truth is there are many ways to make your business more valuable that are not that difficult.  You could develop long term employee contracts for your key employees, enlist some type of annual service agreements for your customers, document or register proprietary trademarks, patents, or other intellectual capital.

Times like these make it even more important.  Fact is, right now might not be the right time to sell.  Let's say you are in the construction business.  Most construction companies did not have a good year last year.  That translates to a buyer who will look to pay you a price based on a multiple of those depressed earnings from last year, even though your company could turn around tomorrow, and begin making earnings consistent with your historical profits.

Hopefully you don't have to sell immediately.  But, you should take this as a wake up call.  Some companies in your industry actually increased their revenue in 2008.  They will demand a primium for their business  for sale.  What did they do differently?  Were they specialized?  Did they have more diversification across their customer base or industry segments?  Do they have long term contracts with their customers?  Are they low cost suppliers of their service?

The key is to look at your business, and try to set it up in such a way that the business has consistent earnings.  Business buyers pay a large premium for consistency.  The turtle wins the race, not the rabbit.  When you go to sell your business, you will be paid a premium for relativelly small growth, vs. huge gyrations of large growth and flat years.

Princeton Capital Strategies, LLC

Providing Value Beyond a Typical Business Broker

wwww.PrincetoncCapitalllc.com

 



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