News & Insights

Are You Skeptical About the Value of a Business Valuation?

Friday, September 26, 2014
 Spending money on a high-quality business valuation is one of the best investments a business owner can make. Most business valuations cost from between $1,500 to $8,000 depending on the size and complexity of the business being appraised and the thoroughness of the valuation report. This isn't pocket change, so it's not surprising that some business owners feel unsure whether or not spending that money makes sense. Here are a few questions that business owners often have when considering purchasing a business valuation and our responses to them.

Because business valuations are so subjective, can't they be manipulated to justify any value that the appraiser and business owner want to arrive at?


There are definitely aspects of a business valuation which are subjective, and uncertified business appraisers have been known to abuse this fact. For this reason it is important to confirm that your business appraiser is certified by a respected organization such as the Institute of Business Appraisers (IBA) and is in good standing with this organization. The rigorous IBA valuation training and framework is widely respected in the M&A industry, incorporates sound financial theory, and is backed up by empirical data. Each valuation that Rua Associates’ certified valuation partners generate is arrived at after extensive financial analysis and the utilization of four different valuation methodologies. The values from these various methodologies are then weighted and blended into a final business valuation number, so that anomalies and outliers in the data set are smoothed out. A business valuation, when done correctly, is not voodoo pseudoscience and our financial analyst and advisors are always happy to explain to clients the rationale behind each assumption and method that we and our valuation partners use. 


I'm planning to sell really soon. Why not just bring my company to market?


There are several reasons why you should still get a valuation. First of all, a valuation serves as a benchmark that you can judge buyers' offers against. A market for a highly liquid asset (stocks and bonds) with many different buyers and sellers can quickly arrive at the “true” value of an asset. This process is called price discovery. Small businesses are very illiquid assets, as compared to publicly traded stocks, and the market in which they trade is very inefficient and imperfect. Using the market to discover the value of a small privately held business can be unreliable. Even a desirable business may have only two or three serious offers on it and without a valuation, the seller won't have a benchmark against which to judge whether or not those offers are reasonable. Also, if the offers come in lower than the valuation predicted, the seller can use that same valuation to justify a higher asking price. Lastly, sometimes sellers feel regret after selling their businesses because they wonder if they have “left money on the table.” A valuation provides sellers the added retrospective comfort that they sold their business for a fair price.

In addition to providing a sound valuation, our Proven Process includes three other important components that lend credibility to the valuation. The first is a Sellability Score, which is a powerful tool for assessing the strengths and weaknesses of each business relative to industry benchmarks. Next is a Market Test. Using a blind overview of the company that obscures the company’s identity, Rua reaches out to active individual buyers and private equity groups who can, based on the limited information we provide them with, give us a ballpark estimate of what they would consider paying for the company (if it were to go to market) and how they might structure the deal. Lastly, we go to banks that we have relationships with to see how they would most likely structure the transaction and if they are in agreement on the valuation.

I'm not planning on selling my business for a couple of years yet. I'll wait until then to get a valuation.


The reason that you check your 401K's value more than once every five years is so that you can determine whether or not your are on track to reach your personal and financial goals. For most business owners, the sale of their company will provide the majority of their retirement funds. It stands to reason then, that a business owner should be monitoring the value of this asset with some level of frequency. A lesser known fact is that a valuation can be an excellent management decision-making tool and also useful for making strategic decisions. Should you invest in attracting a more diverse client base (which lowers your risk, and thereby cost of capital) or improve your margins by investing in that machine you've been thinking about buying? A valuation allows you to plug in the numbers and see how different decisions will affect the probable value of your company.

A Blood Pressure Test For Your Business

Tuesday, September 16, 2014
 

When was the last time you had your blood pressure tested?

Taking your blood pressure is one of the first things most doctors do before treating you for just about anything. How much pressure your blood is under as it courses through your veins is a reliable indicator of your overall health; and it can be an early indicator of everything from heart disease to bad circulation.

Does it tell the doctor everything they need to know about your health? Of course not, but one powerful little ratio can give the doctor a pretty good sense of your overall wellbeing.

Likewise, your Sellability Score can be a handy indicator of your company’s wellbeing. Like your blood pressure reading, your company’s Sellability Score is an amalgam of a number of different factors and can help a professional quickly diagnose your company’s overall health.

Predicting Good Outcomes Too

When a doctor takes your blood pressure, they not only rule out possible nasty ailments; they can also use the pressure reading to forecast a healthy life ahead. Similarly, your Sellability Score can predict good things for the future. For example, based on more than 10,000 business owners who have completed their Sellability Score questionnaire, we know the average multiple of pre-tax profit they are offered for their business when it is time to sell is 3.7. By contrast, those companies that have achieved a Sellability Score of 80+ are getting offers of 6.6 times pre-tax profit.

In other words, if you have an average-performing business turning out $500,000 in pre-tax profit, it is likely worth around $1,850,000 ($500,000 x 3.7). If the same company improved its Sellability Score to 80+ while maintaining its profitability of $500,000, it would be worth closer to $3,300,000 ($500,000 x 6.6).

Are you guaranteed to fetch 6.6 times pre-tax profit if you improve your Sellability Score to 80? Of course not. But just like blood pressure, one little number can tell you and your advisor a whole lot about how well you are doing; and your advisor can then prescribe an action plan to start maximizing your company’s health – and its value down the road.

Heart disease is called “The Silent Killer” because most people have no idea what their blood pressure is. People can walk around for years with dangerously high blood pressure because they haven’t bothered to get it tested. The first step on the road to health is to get tested. If you have a great score, you can sleep well at night knowing you have one less thing to worry about. If your score is not where it should be, then at least knowing your performance can get you started down the road to better health.

If you’re interested in getting your Sellability Score, please visit: http://www.ruaassociates.com/sellability-score

The Last Mile

Monday, August 18, 2014
 - Posted by Randy Rua, President of Rua Associates

The last mile is where many deals that had previously been clipping along at a good pace begin to stagger and keel over. The cumulative effect of additional legal conditions demanded by both side’s attorneys and the financial analyses loaded on by CPA’s proves too much for many M&A transactions to survive. Meanwhile, with the end in sight, it is not uncommon for both buyer and seller to temporarily go a little bit crazy and subconsciously sabotage what they’ve both been working towards for so long. Indeed, the last mile is a lethal place for even the most promising of transactions. What we should ask ourselves is why is the last mile so tough and what can Rua Associates do about it?

Challenge: Reality Sets In

At some point, a switch is thrown in the mind of the buyer and the seller and they realize that everything they’ve been considering from a theoretical point of view is rapidly turning into reality. For the buyer, it’s the difference between looking at spreadsheets and legal documents to thinking about getting keys to a building and running their first staff meeting. For the seller, it’s a shift from having conversations about selling to preparing to tell their employees that they are soon going to have a new boss. Anxieties and uncertainties about the future have the powerful effect of distracting both parties from their ultimate goals. 
 

Challenge: Devil in the Details

All too often details are not seriously scrutinized until late in the game. As the reality of the transaction sets in, details become much more important. Tax implications, working capital adjustments, employment agreements, assumptions used in financial models, all of these previously unexciting details are suddenly approached with a new sense of importance and urgency. In M&A transactions, small details can translate into huge changes in risk and valuation. Or, buyers can be tempted to use these “surprises” as leverage to materially alter the terms of the deal even after a LOI has been signed. 
 

Challenge: Emotions

The marriage analogy gets used often in the M&A Industry and it makes sense, because finding a good match is important and the lives of the buyer and the seller will change a lot, if the transaction happens. So it should be no surprise that emotions run high and feet get cold as the big day draws near. When jittery nerves are present, it only takes the slightest unexpected event, such as just missing quarterly projections, to throw the entire transaction into jeopardy.

Rua Associates’ Approach:

All of the aforementioned challenges are interrelated and Rua Associates believes that the single most important way to surmount these last mile challenges is preparation. Unlike our competitors, Rua Associates spends a tremendous amount of time and resources doing analysis and market research before bringing a company to market or looking for acquisitions. We get into the weeds now instead of later and consider a potential transaction from every perspective. Financial and personal goals are thoroughly discussed. The preparation that we do at the beginning of our process ensures that neither buyer nor seller is hit with last minute “surprises.” It is this preparation that minimizes potentially deal-killing hurdles and gives our clients the confidence they will need to make it through the last mile.

Your Advisors: Friends or Foes?

Wednesday, July 09, 2014
 

- Posted by Randy Rua, President of Rua Associates

One of the aspects that make closing a business transaction so difficult is all of the different parties and competing interests involved. Not only are the Buyer and Seller trying to shift risk back and forth to each other, but each side’s advisors are not always seeing the situation from exactly the same perspective either. How your advisors are paid and the role that they serve can and should influence their perspectives and the way that they think. So, you should not be surprised if tensions occasionally arise within your own advisory team. In fact, if there are never any tensions between your advisory team members, you should be very concerned. 

 
Every transaction needs advisors for 3 key areas: Intermediary, Legal, and Financial. Let’s take a quick look at some of the advisors that you’re likely to be working with closely throughout a transaction.

Intermediary - M&A Advisor

- Primary concern: Serve the client by getting the deal closed. Create a strategy, manage the entire transaction, foresee problems, and when problems are unavoidable, solve them.
- Incentive structure: Most M&A Advisors make the majority of their money from success fees. Payday is when the deal is closed.

Legal – Transaction Attorney

- Primary concern: Serve the client by minimizing legal risk. Imagine everything that can go wrong from a legal perspective, protect the client from the most unscrupulous of characters, and attempt to eliminate and mitigate as many risks as possible.
- Incentive structure: Bill hourly until the transaction is complete or falls apart.

Financial - CPA

- Primary concern: Serve the client by minimizing taxes and tax allocation, assist with due diligence, creation/review of financial statements, help the client understand financial risks in the deal structure.
- Incentive structure: Bill hourly for transaction services. Typically the same billing structure as for non-transaction work done for client on an ongoing business.

Financial - Banker

- Primary concern: Serve the bank and client by providing maximum funding with minimum financial risk. Bring good deals to the loan committee and structure the loan in such a way that the borrower can make payments through good economic times and bad.
- Incentive structure: Salary, and possibly small quarterly bonus

Given that these advisors are incentivized differently and have been educated to maintain different perspectives, it is not uncommon for disagreements such as the following to arise:
• The Banker wants a personal guarantee from the Buyer and the Buyer’s Attorney says no.
• The CPA wants more allocation to goodwill for taxes but the Bank wants higher asset value for collateral purposes.
• The Attorney is insisting their client have an item in the purchase agreement that M&A Advisor knows is a hot button item of the other side and may cause them to walk.
• The projection seems reasonable to the M&A Advisor, but the buyer’s CPA and Banker think it is too optimistic. 

At Rua Associates, we believe that it’s important to acknowledge that these tensions exist and we are glad that they do. It’s no secret that Attorneys, Bankers, CPAs and M&A Advisors have different perspectives supported by different compensation structures. Bankers want their customer to have more skin in the game and Attorneys want that same client to have less. M&A Advisors focus on meeting the client’s goals through completing a transaction, and Attorneys and CPA’s focus on avoiding risk of doing a transaction, sometimes to the point they would prefer a transaction is not done at all. The tensions that result from these differences in perspective are not only real but important and useful. Each advisor is a check and balance to the others. By considering the merits and flaws of a transaction from every perspective, the client is well served. As M&A Advisors, we respect and understand the critical role our clients’ advisors fill and we hope that they understand the role that we fill too.

How Can You Best Be Served By Your Advisors?

1. Clearly communicate to your advisors not only your goal, but also your priorities. Explain how much risk and what kind of risks you are willing to accept.
2. As much as possible, take every opportunity to get all of your advisors into the same room (or on the same conference call) and don’t be afraid of the tension that sometimes results. Disagreements are usually present when there is no clear answer, which means that discussion and multiple points of view are necessary.
3. Checks and balances only work if power is shared. Don’t let one single advisor completely over influence your decision making or over power the input from other advisors. 

We are blessed to live in a community that has so many respected professional advisors, many of whom we have had the privilege to work with for over 50 successful transactions.

Hello West Michigan!

Tuesday, June 17, 2014
 
- Posted by Randy Rua, President of Rua Associates

We would like to share with you our insights and experiences from the field of mergers and acquisitions. Each day we have the honor of helping our clients through their transitions, whether they are buying or selling a business. Each new project and transaction is another opportunity to apply all that we've learned and add to our team’s cumulative knowledge. It is our knowledge and experiences that we want to share with you a couple times a month. We’ll be sharing case studies, observations about our local market, and helpful M&A tips.

Why are we doing this? Good question. Three reasons:

# 1: It’s educational.

A savvy business person might question the wisdom of an M&A firm that uses the internet to broadcast its “secrets” to anyone with a computer and an internet connection. However, we don’t think creating some sort of mystery behind our trade is good for you or for us. We believe that the better buyers and sellers understand M&A concepts and the market, the higher the probability of a successfully closed transaction. In fact, education is a key component of the internal process that we take each of our clients through. We have nothing to fear by sharing our knowledge and experiences with you because our competitive advantage is not a just collection of trade secrets that we keep to ourselves. Rather, our competitive advantage also includes our uniquely skilled employees working as a team, our collective knowledge and experience, and our proven transaction process which allow us to consistently bring deals across the finish line. 

# 2: It’s a way for us to introduce ourselves.

An individual or corporation looking to buy or sell a business will quickly find that there are numerous advisors and firms that they can choose to work with. It can be a tough decision to put the fate of your transaction in the hands of a group of people that you may have only met with a few times. Wouldn’t it be a better idea to really get to know your advisors and what they’re about? By sharing our thoughts, we are giving you the opportunity to get to know a bit about us before we even meet face-to-face. We also want to demonstrate just how knowledgeable and passionate about M&A we are. It is our hope that this information gives you an idea of what we’re capable of and what we’re about.

# 3: M&A is fun.

M&A is a fascinating topic. No, really, it is! It’s what we live and breathe each workweek (and some weekends too).How many other jobs allow you to engage with so many different fields of knowledge? Whether you’re buying or selling a business, you can expect to bump into concepts from the world of finance, microeconomics, macroeconomics, accounting, corporate law, marketing, psychology, and even a little philosophy. By leveraging the backgrounds and experiences of all of our team members, we hope to not only educate, but in fact entertain you by opening your eyes to these fascinating fields of knowledge. Nobody is smart or skilled enough to pull off a smooth transaction all by themselves. M&A is just too complex. But, with the right team, you can not only close a transaction, but have fun along the way. 

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