As a mergers and acquisitions intermediary, one of the most contentious discussion topics I encounter when meeting with a prospective business seller relates to business valuation.  Most potential sellers have a preconceived notion of what their businesses are worth rather than knowledge based on specific value drivers to support a realistic assessment of value.

The following list represents some of the business and economic factors that influence business valuation.

Buyers of businesses typically will require the Seller to leave a negotiated amount of working capital in the business at the date of sale to support its current operations.  One post-closing contractual mechanism that will ensure the buyer receives adequate working capital is commonly referred to as the "Working Capital Adjustment."  Working Capital Adjustments are often subject to post closing disputes. An improperly drafted Working Capital Adjustment may obligate the Seller to pay the buyer a material amount of money after closing.

One of the drivers of Working Capital Adjustment disputes is a lack of attention paid by the Seller's various advisors to the details of drafting or reacting to proposed Working Capital Adjustment contractual language.  An article titled The Well-Adjusted Purchase Price Adjustment written by Kirkland and Ellis LLP is an excellent source of information on drafting effective Working Capital Adjustment language in a Purchase and Sale Agreement. 

Business owners, make sure you speak at length with your merger and acquisition, accounting and legal advisors about the Working Capital Adjustment the buyer proposes when you sell your business.

When opportunities present themselves it is helpful to evaluate them to make sure they comply with your goals, values and beliefs.
  
When I first meet with a business owner who is considering selling his/her business, I want to know what is really driving the decision. This usually leads to a discussion of their post sale plans.  As you can imagine, the variety of, and passion levels for these plans run the gamut.  That being said, it never ceases to amaze me how quickly some owners will abandon important goals to hold out for a few additional bucks.  

The following is a frequent scenario: Older baby boomer business owners will emphatically state that they want to spend more time with their wives, children/grandchildren, travel extensively and get involved in a cause to help others.  Therefore, it is important that they are free and clear of their business duties soon.... usually within 18 months.  From here the discussion turns to the spirited topic of what is my business worth? Frequently, the owner's business valuation expectations are higher than what the market will pay. However, in many cases what the market will pay combined with the owner's other invested assets is more than sufficient to support the owner's goals and lifestyle moving forward. But that doesn't matter!  Because the owner wants an unrealistic 6x valuation multiple for the business but can only really expect to receive a 5-5.5x multiple, he is willing to put his future on hold and keep the business for another three to five years.  To what end? 

We are living in extremely volatile, risky times. There is no guaranty the business will appreciate in value. And most importantly, the business owner will never get back the three to five years of important experiences and memories he lost out on.  If you are a business owner experiencing a similar dilemma, seek the counsel of a neutral party.

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With the Bush tax cuts scheduled to expire at the end of 2010, business owners planning the sale of their business will likely have to pay substantially more in transaction taxes if they don't complete the sale of their company in 2010. Owners interested in retiring who aren't confident that there will be strong improvement in their 2011 business are finally coming to the realization that they should sell now. How do I know this is a "sale" motivating factor? Within the past week or so, my partner and I have been approached by four business owners who have cited lower transaction taxes (i.e., keeping more after-tax transaction dollars in their pockets) as the primary reason for selling now.  Conversations with attorneys, accountants and private equity firms confirm my experience is not an isolated incident.  Completing the sale of a company can take six or more months. 

The MergerMaven blog and website are dedicated to helping over 280,000 middle-market business owners (revenue of $5 million to $200 million) prepare for, and when ready, sell their business for maximum value.

For most business owners, selling their business is a daunting task.  If you frequently read MergerMaven’s blog and visit our website, I guarantee you will come to understand how to sell a business. After all, getting your business sale or merger transaction done right is critically important not only to you and your family, but to other valued stakeholders such as your partners, loyal employees and vendors, etc.

So then, what can you expect to get out of reading MergerMaven’s Blog?  First, I want to make this an interactive process so please email me (Bill Quish) with questions or topics you would like to see addressed.  Second, this blog will bring owners insightful and timely information, tips and advice including articles from and interviews with other experts associated with exit/succession planning, selling a business, mergers and acquisitions, and raising capital.  You will benefit from the sage advice of a wide variety of experts.

Remember, it is never too early to start planning for the exit from your business. Involuntary events (e.g., death, disability, divorce, burn-out, partner issues, new stronger competitor, etc.) often force a premature exit!  Be prepared so you don’t leave money on the table.

I look forward to our interactive journey together.  Please feel free to contact me at bill@mergermaven.com.  Talk with you soon!

Bill Quish

Bill Quish is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and a Senior Managing Director at Lyons Solutions, LLC.  Bill also tweets about selling a business, mergers, acquisitions and exit planning on Twitter .