Getting the highest value for the sale of your business starts with a thorough and professional business valuation. In the last several posts, we’ve explored the multiple steps requiring valuation skills like preparation of income statements, balance sheet adjustments, market guides and the analysis of a business’s strengths.
Our last step in the business valuation process is to determine the weaknesses of the subject company. One aspect of this process is to compare the subject company to its peers. Lone Peak Valuation Group principals Rick Hoffman and Jeff Pickett recently outlined different purposes of evaluating the strengths and weaknesses in a QuickRead article.
Weaknesses. “Analysts must learn to identify where the subject firm is weaker than its competitors. Management can use the time before a sale to focus on improving such weaknesses,” Hoffman and Pickett stated.
Analysts should classify weaknesses into two categories:
- Improvable. These are identified weaknesses that can be improved before the sale.
- Un-improvable. Some weaknesses cannot be improved or would cost-prohibitive.
The un-improvable weaknesses can be very useful. These weaknesses are the dream of synergistic buyers. “For example, imagine a firm that buys volumes which are too low as to get the best pricing for its raw materials,” Hoffman and Pickett stated. “ Further, assume the firm would have to increase by threefold to get better pricing. Once this weakness is evaluated, the analyst should make sure management and the broker understand that a firm twice as large as the subject is likely to pay the most for the business. In fact, they should pay more than fair market value!”
By identifying the best potential buyers at the outset of the sale process the seller maximizes the possibility of getting the best price for his business.
Sellers that proactively plan for an exit strategy protect the value of their business, which they worked hard to create. Please give us a call today to help improve and protect your business value. KLP is an accounting firm located in northeast Indianapolis providing valuation, tax and a full range of other accounting services, we can help.
