CEO Advisor Newsletter March 2013
Selling Your Company - How to Determine a Selling Price and Accomplish Your Goals
The potential buyers don't care how much it cost you to develop the product, or how much your investors have in, or how much you need to retire, or how much you think your business is worth. Buyers look at the potential ROI (Return on Investment) in a company based on some reasonable valuation methodology or multiple of sales and/or earnings. Depending on the industry and type of business, buyers are typically very knowledgeable in determining today's fair market value. If you are fortunate enough to have a product or service, such as a technology that can be leveraged, the market may look at the future returns of that technology in stronger hands. There are benchmarks that are often used as a starting point for many businesses.
The most common valuation method in a merger or acquisition is an EBITDA multiple for the trailing twelve months. EBITDA is simply an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is the standard for privately-held companies just as PE multiples are to a business valuation metric for publicly-traded companies.
There are additional methods such as revenue multiples for unprofitable companies, discounted cash flows and others, as well. Depending on your type of industry, size of your market, rate of growth, uniqueness of product or service, technology or intellectual property, barriers to entry or patent work, gross margins, management team and other factors, the industry benchmark valuation for your business may be 4-6X EBITDA, for example. Manufacturing companies tend to be lower, service companies can be somewhat lower, and SaaS software companies can be substantially higher.
The three largest players in your industry may all be interested in the acquisition of your company and each one may submit an initial bid of, say 4.5X EBITDA. Since you are about to launch a new product or service you are looking for 6X EBITDA. The result is that we have a typical valuation gap between the buyer and the seller. This is the primary reason that many acquisition transactions do not happen. The seller is terribly disappointed and states that these buyers "just don't get it."
The buyers have experience in making several acquisitions in their space and have their business valuation metrics pretty much in stone and think the sellers are being unreasonable in their expectations. So how is this situation negotiated? One of the most important roles of a business advisor on mergers and acquisitions is to devise a transaction value and negotiate the Letter of Intent (LOI) in a way that works for both parties. As a third party objective advisor, we establish alternatives for both buyer and seller to consider given their hard and fast valuation positions.
Here is an example of a business sale transaction structure that could be a win for both buyer and seller:
- Cash at Close which is approximately a 4.5X EBITDA multiple for the trailing twelve months.
- An Earn Out (Additional Transaction Value or Bonus Amount) based on the selling company's sales and EBITDA one year after the transaction is closed. The Earn Out is at risk if not met, but is set to net the founders or shareholders a 6X EBITDA multiple equivalent on the current fiscal year.
- Certain Assets (automobiles, domain names, etc.) were excluded from the sale and are to remain with the seller as they had specific value to the seller and minimal value to the buyer.
- An Attractive Compensation Package, including stock options in the acquiring company, was negotiated on behalf of the seller for him/her to remain with the acquiring company for up to three years and possibly longer.
- Specific Non-Compete Stipulations were negotiated out of the Non-Compete clause providing the seller far more flexibility in the future, as well as, other terms favorable to the seller while being acceptable to the buyer. It is critical that you seek professional help in this process.
The acquiring company may start out at a decent valuation, but as they go through their due diligence process will find one issue after another that causes them to renegotiate and reduce their offer. They often throw out the term "material adverse change" in an attempt to justify their value reducing tactics. A business advisor seasoned in mergers and acquisitions will be able to counter many of these points and keep the sale on track.
Some M&A or corporate business development directors get judged or paid bonuses on how much below the original offer they can ultimately close the deal. To stem this bad buyer behavior it is important to have options and manage your cash and your business prudently during the sale process.
Whether you are considering buying a company or selling your business, it is critical to properly plan, research and get the needed advice. With over one hundred variables involved, a third party business advisor with experience and expertise in mergers and acquisitions and negotiating will be the difference in achieving your goals.
CEO Advisor, Inc. provides management advisory services, including mergers, sales and acquisitions to CEOs and owners of small and mid-size companies. Call CEO Advisor, Inc. today at (949) 629-2520 or email Mark Hartsell, CEO, MBA at MHartsell@CEOAdvisor.com or visit www.CEOAdvisor.com for more information.
CEO Advisor, Inc. Advises Surgical Media, Inc. dba CosmoMD on Growth, Funding
- CEO Advisor, Inc. (www.CEOAdvisor.com), a leading business advisory firm serving the needs of CEOs, presidents and business owners of small and mid-size companies is providing growth, funding and sales strategy advisory services to the CEO of CosmoMD (www.CosmoMD.com), a premiere online directory of cosmetic physicians, including the cosmetic or specialty surgeons' credentials and related pre-screened information, and fast, easy appointment scheduling for patients and consumers.
- CEO Advisor provides hands-on, affordable advisory services to CEOs, presidents and business owners of small and mid-size companies on growth, strategy, sales, sales team building, marketing, operations, finance, funding, mergers and acquisitions to grow companies to the next level. As a trusted CEO Advisor® to business owners since 2004, the firm specializes in business consulting in a one-to-one advisory role on a weekly basis to maximize sales, profits and a return on their investment.
- Mark Hartsell states, "CosmoMD is nearing the launch of a cost-effective online marketing and appointment scheduling solution for cosmetic surgeons that does not exist in the market place today. Founded by Dr. Brad Tran, a surgeon himself, this is a tremendous business model that will prove to be very lucrative for the cosmetic surgeon members on this exclusive site. CEO Advisor is providing expertise and hands-on advice to accelerate growth and assist in launching the company."
- About CosmoMD
- CosmoMD is a single source online solution for cosmetic and specialty surgeons, including plastic surgeons, cosmetic dentistry, cosmetic dermatology, LASIK eye surgery, hair transplant surgery and other specialty surgeons. CosmoMD offers searching, comparing credentials and capabilities, and booking an appointment online throughout the United States. Contact CosmoMD at (949) 306-5396 or email Dr. Brad Tran at firstname.lastname@example.org for more information.
- About CEO Advisor, Inc.
- CEO Advisor provides business advisory and consulting services affordably and effectively to meet the specific needs of CEOs, presidents and business owners of small to mid-size companies in a wide range of industries, including technology, professional service firms, light manufacturing and many more. CEO Advisor's mission is to advise business owners with the needed expertise and focus, coupled with hands-on advice and work performed to grow your business to the next level. Contact Mark Hartsell, CEO of CEO Advisor, Inc. today at (949) 629-2520 in Orange County, CA, by email at mhartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.