By Jeff Swiggett, CBI, M&AMI
Whether or not a company owner is ready to sell, I always recommend that they seek an Opinion of Value (OPV). It serves as a useful benchmark for their businesses and is the first step in developing an exit strategy. A firm like ours, routinely provides OPVs at no charge. We are as interested in finding out more about a potential sale opportunity as the seller is interested in our view on what the market will bear.
For small companies that are valued between $500,000 and $5,000,000, a fairly simple OPV should be able to clarify three things; what price the market is bearing, the terms under which buyers are willing to pay for it, and what parts of the seller’s balance sheet will be transferred in the sale.
- Value: Generally, our OPVs are based on comparing what firms in the same industry with similar revenues and earnings have been selling for. We subscribe to comp sales databases of closely held businesses and that can indicate within plus or minus 10% what the market is bearing for a seller’s firm.
- Terms: What valuations from accounting firms and other third-party valuation companies won’t tell you in their opinions is how buyers will pay for a seller’s business. But knowing this is often as important as knowing the company’s value. M&A Advisors are keenly attuned to why a company may command all cash at closing or why it may be saddled with an earnout that is subject to adjustments.
- Any OPV should also clearly define what is included in the sale or more to the point, what items on the balance sheet are being sold. Does the sale include any current assets such as accounts receivables or any current liabilities such as accounts payables or short-term debt? Without knowing this, sellers don’t know what a valuation number represents.
Most OPVs need some basic financial information on a company’s revenues and earnings, the value of their assets and a characterization of the revenue streams. A good list information that will define all of this is shown below:
- Business Tax Returns for the past 5 years
- Profit & Loss Statements
- Trailing 12 Month
- Balance Sheet (most recent)
- Approx. Fair Market Value of Company Assets and List of Assets
- Approx. Value of Inventory (if material to sale)
- Accounts Receivable Aging Report
- Summary of Revenue Distribution by Customer
Armed with this information, M&A firms can then generate OPVs fairly quickly.
You don’t need to conduct an expensive valuation from an accounting firm to get a basic understanding of your company’s value and the way it will be sold. Once you have this, it can initiate a whole host of discussions with the rest of your advisors.