HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “Valuation – What’s My Business Worth” Part I
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

For the past several months our articles have been reviewing the various facets of Preparing Your Business for Sale/Enhancing the Value of Your Business in order that the business owner would have a better feel and appreciation for what is required to maximize the “saleability” of his/her company. With that review completed, the next steps in the process (prior to marketing the business) are to determine how much the company is worth and what we want to ask for it (not necessarily one and the same thing).

Now, however, before we can determine a value, we need to ask ourselves the following questions – What exactly are we selling? What actually is to be included in our asking price?
(Yes, I realize the above and below are very basic issues but you would be amazed at how often a difference of opinion arises between buyer and seller regarding each’s assumptions and/or expectations relative to what is to be purchased/sold).

Is real estate included in the sale?
- Do we have an appraisal or other documentation to support its value?
- If not owned, is the lease assumable or transferable?

Is inventory included in the sale?
- Is it current or obsolete?
(Buyers will not pay for non-saleable inventory)

Are accounts receivable included in the price?
- Are they current and collectable?
- Are you, the seller, prepared to offset the purchase price $ for $ for all receivables not collected after a certain period of time (e.g., 90 days)?

Are all fixed assets (FF&E – furniture, fixtures, and equipment) included in the sale?
- Do you have an appraisal or other documentation attesting to their value?
- Has equipment been upgraded on a regular basis and well maintained?
(Again, like inventory, buyers will not pay for obsolete equipment)
- Is some of the equipment leased? Is the lease assumable/transferable?
- Are any items personally owned by the seller but utilized by the company?
(Are these to be included in the sale?)

An additional factor which must be dealt with prior to the establishment of a business value is the type of sales transaction to be effectuated - i.e., is the sale going to be an asset or stock sale? This topic is too detailed to discuss in this article (we will review it at length in a future article) but suffice it to say that the type of sale/purchase transaction can substantially impact the sales price. The reason for this is the owner is primarily interested in “after tax” dollars and, the way the sale is structured (asset vs. stock), can have a significant effect on that number.

The above are only a few of the issues to be addressed prior to the determination of the value of the “whole” business to be sold. Regarding valuations, there are a number of different ways in which businesses can be valued. Some of the more common methodologies are:

• Multiple of Earnings/Market Comparison valuation
• Discounted Cash Flow/Income valuation
• Asset valuation

The above methods of valuing a business as well as the common definitions of earnings (EBIDTA, SDE, etc) and their impact on valuations will be examined in our next several articles.

See you next week in this same space for our next article. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.