Manage your company to maximize its value?
If the sale or transfer of your business, you must have found their own idea of the value of your company prefer to be considered. In essence, means to view your company as a dispassionate investor or buyer, instead of emotionally committed owners.
The first step is to take your business for sale package. Packaging your business for sale will help you to make it a better deal that is worth more to a futureOwners and also make it easier for you, is to manage this transition.
In determining the value of your business, apply a few principles:
1. The value to be assigned clearly to the owner, that individual. I can artificially inflate the price, but above all the roles and relationships of the owners have been created, you can dramatically change with his departure, and thus influence the price.
2. The value is always an assessment of future income based on the uncertainty or intendedRisks associated with obtaining the expected returns. Regardless of the valuation, (Multiple P / E, discounted cash flow or payback period) the estimated future income stream to be solid and the known risks must be reduced to obtain the best possible rating.
3. Current owners tolerate more risk, uncertainty and 'fuzzy' circumstances as the new owner / investors. You can use the fact that you are dependent on one key supplier OK, because he was an old high school buddy, or thatThey signed no lease, but the landlord is your uncle, or that your best salesperson is your only son, and he wants to be president. Interested parties are much less enthusiastic, if all these issues are resolved to their satisfaction by investing in advance of any offer to buy or.
4. Buyer accepts various different prices, terms and conditions. In general, range from a passive investor looking for a reasonable return with reasonable risk to active investors,provides the potential to be better than your forecast for its own account do to the strategic investor, who still see greater opportunity in the purchase of competitors, suppliers or customers, and merging with its existing business to increase revenues, eliminate unnecessary overhead and profit significantly . increase The selling price will increase accordingly.
Various valuation methods can be used and it is often a good idea to test different approaches to see what values they yieldand then select a "market" price that can be reasonably supported by any method of valuation.
P/E multiple
The price/earnings multiple is a well recognized valuation method and widely reported for public companies. Current price divided by last reported annual earnings per share is a simple concept and a simple calculation. Unfortunately, it is not usually very relevant since the price today is based on the expectation of future earnings, not last year's.
For example, Google's price today (December apparent 10.2007) by $ 718 a P / E of 56x based on current earnings of $ 12.78 per share. But if we are the current consensus of analysts of $ 19.51 for the next 12 months, the P / E is a "reasonable" 36.8x. High as before, which compares the major competitors to Microsoft, at 22x.
What is the P / E for your company? In general, small owner-managed businesses can support P / E multiple of about 5x. It may be higher if the results are very safe and notdepending on the current owner / management team and lower, if future profits are risky and largely on the existing relationship with the owner. The buyer will usually look at operating income or EBITDA (earnings before interest, determine taxes, depreciation and amortization) profitability before financing, taxes and capital costs. This means that an equity value of $ 500,000 on your $ 100,000 per year on operating earnings, if you accept a 5x P / E ratio.
PaybackPeriod
Some customers will insist on the search based only on net cash flow and payback period at an acceptable price to expected earnings can. They will examine their net investment to be determined after consideration of financing, taxes, promotion and payment terms, how long before they earn back their investment and a positive cash flow. They are probably at least payback period, depending on the risk, 3 to 5 years.
Discounted Cash Flow
OtherInvestors are taking a purely financial approach of calculating discounted Net Present Value (NPV) or return on investment (ROI). The future net cash flows will be forecast to reach a valuation. The buyer is then compared to its rate of return discount, usually 15% to 20%, or to calculate the expected ROI is the return on investment.
Using the same methods will be a series of evaluations, depending on the different forecast scenarios to your organizationbest estimate of market value.
For more ideas on how to get the maximum value for your company, contact us or visit business solutions from Direct Tech on www.directtech.ca.
Del Chatterson © 2007