Purchase - sale of companies and businesses | Certified Valuation
Selling a company is a complex and significant process that requires careful planning and consideration of various factors, it can occur due to different situations that we will mention below, from the opportunity to obtain new profits to the sale due to the need for quality investment.
It is important to note that the decision to sell a company should not be taken lightly, as it can have significant financial and even emotional implications, before proceeding with the sale, it is essential to carefully evaluate the pros and cons, consider the impact on employees and customers and seek professional advice to ensure you make the best decision possible.
What are the steps to follow for the sale of companies or businesses?
Decision making: First of all, you must be sure of the decision that is about to be executed, because the entire process involves a very large movement, expenses, audits, etc. Therefore, it is complex to stop or cancel it. The process of transferring or selling a business also affects people emotionally, especially if the business is a family business. You must be completely sure of the sale and have previously evaluated whether it is the best option. option.
Preparation and company evaluation: It is necessary as point number 1, to carry out a thorough evaluation of the company to determine its fair market value. It is possible to hire a professional or a valuation company to carry out this analysis. As a second step, prepare all relevant documentation, such as; financial statements, contracts, intellectual property records, tax reports, among others.
Take care of confidentiality: Keep the sale confidential, especially in the initial stages, to avoid uncertainties between employees and customers, use non-disclosure agreements (NDA) to protect sensitive information.
Professional advice: Consult with lawyers, accountants and financial advisors and appraisers experienced in business sales, they will help you navigate the process and protect your interests, including negotiating.
Identification of potential buyers: Search the market for potential buyers through intermediaries, personal contacts or M&A platforms and assess the suitability and financial capacity of potential buyers to ensure they are serious candidates, brokers can help you with this process.
Talks and offers: Initiates negotiations with interested buyers and works to reach an agreement regarding the price and terms of the sale, it is possible to receive non-binding offers and then select the most appropriate one to move forward in the process.
Due diligence: Buyers will conduct an exhaustive “due diligence” to thoroughly evaluate the company and confirm the information previously provided. You must provide all requested documentation and cooperate fully with the due diligence team.
Purchase and sale contract: Once an agreement is reached, a sales contract will be drawn up that will establish the final terms and conditions of the transaction, it is advisable that lawyers for both parties review the contract to ensure that your interests are protected.
Closing of the sale: Once all the conditions have been met and the necessary approvals have been obtained, proceed to closing the sale, the ownership is transferred and the agreed payment is made, make sure to follow all regulations and legal requirements in this process.
Transition: After the sale, a transition period may be necessary to ensure a smooth transfer of the business to the new owner, work with the new owner to facilitate a successful transition and handover of personnel if that is the arrangement.
Why sell my company or business?
Opportunity to make profits: If the value of the company has increased significantly since its founding or acquisition, the owner may decide to sell it to obtain an attractive return on investment.
Changes in personal circumstances: Owners may face personal changes, such as health issues, retirement, or the need to relocate, leading them to sell the business to focus on other areas of their lives.
Capital need: If the company needs an injection of capital to expand, invest in new technologies or acquire other businesses, selling it can be a way to obtain the necessary resources.
Financial difficulties: If the business is experiencing significant financial difficulties or a decline in profitability, the owner might consider selling it before the situation worsens.
Changes in the market: Changes in the market or industry may cause the owner to consider selling the business if they see a decrease in demand for their products or services.
Lack of succession: If the owner does not have a clear succession plan and there are no relatives or employees interested in taking over the business, he or she may choose to sell it.
Investment diversification: The owners may decide to sell the company to diversify their investments and reduce the concentration of their wealth in a single asset.
Fusions and acquisitions: For larger companies, the sale may be part of a merger or acquisition strategy to strengthen market position or improve operational efficiency.
Advantages of selling your company or business
Advantages for the buyer
- Increase in heritage
- Reinforce the customer portfolio, since when buying a competing company, a greater market share and portfolio is covered.
- Diversification of activities or products and even technologies.
Advantages for the seller
- The gain in return on investment and the increase in the availability of funds by releasing the capital linked to the company.
- Generation of benefits in times of scarcity of financial resources or when there are technical or organizational limitations to maintain the activity.
- Tranquility in moments of tension arising from the generational transition of the business or the interaction between the company and the family.
- Let the business grow if capital investment is necessary.
How to increase the value of my company or business?
Increasing the value of your company is a key objective for any owner or entrepreneur. Here are some strategies you can consider to add value to your company:
- Focus on Quality: Improve the quality of your products or services to create a solid reputation and generate trust in your customers.
- Sustainable Growth: Look for growth opportunities that are sustainable in the long term, explore new markets, product lines or related services.
- Brand Development: Build a strong brand that represents your company's values and mission, as a strong brand can attract loyal customers and increase the perception of value.
- Innovation: Stay abreast of industry trends and look for ways to innovate, develop new products, services or technological improvements that solve current or future problems.
- Customer Support: Provides excellent customer service, a positive relationship with customers can generate repeat business and referrals.
Efficient management: Optimizes internal operations to improve efficiency and reduce costs, this can increase profitability and ultimately the value of the company.
Talent and Team: Build a talented and committed team, human capital is essential for the growth and continued success of the company.
Marketing strategy: Use effective marketing strategies to reach your target audience and stand out in the market.
Intellectual property: Protect your intangible assets, such as patents, trademarks and copyrights, to increase intellectual property and exclusivity.
Solid Financial Information: Maintain accurate and transparent financial records, this can improve the confidence of potential investors and buyers.
Organic Growth and Acquisitions: Consider organic growth and strategic acquisition opportunities to expand your customer base and reach.
Sustainability: Adopt sustainable and ethical practices in your operations. This can attract conscious customers and increase the attractiveness of the company.
Long term planning: Develop a long-term strategy that includes clear goals and objectives for constant growth and improvement.
Growing cash flow: An organization becomes striking when it is able to generate profits and growing cash flow, buyers look for companies whose cash flow increases year after year, since it is a generator of value, its history of constant increase in income can project convincingly into future post-sale growth.
Financial forecast: Several companies do not have reliable financial records, which makes it difficult to track the source of their income, the lack of organization in financial information can suggest to buyers the existence of an underlying problem, therefore, organizations must organize their finances and control systems to present your business in the most favorable light possible.
Differentiation – value proposition: Standing out is a fundamental priority for all companies, however, in the context of the business for sale market, those companies with unique products or services can obtain additional value, as long as they can demonstrate their ability to lead a specific part of the market, for which it is necessary that they develop and highlight any patents, intellectual property or other distinctive characteristics of their offers, which give them a competitive advantage over other players in the industry.
Client portfolio: In the market, companies that have a wide variety of customers are attractive; potential buyers generally look for a customer base in which no single customer contributes more than 8 to 10 % of total sales, depending on As indicated by Forbes, this diversity in the client base protects the company from suffering significant losses by ceasing to have a client of great importance.
Selling a business is a crucial process that involves significant financial and emotional decisions. Before embarking on this journey, it is essential to carefully consider the pros and cons, evaluate the impact on employees and customers, and seek professional advice to make the best decision possible.
Once the decision to sell has been made, the path forward involves key steps, from business preparation and evaluation to negotiation, due diligence and finally closing the sale. The advice of professionals, such as lawyers, accountants and appraisers, plays an essential role in this process.
Increasing the value of your company is a priority, and this is achieved through quality, sustainable growth, building a strong brand, innovation and operational efficiency. Maintain accurate financial records and seek to diversify your clients to attract potential buyers.
If you're wondering why to sell your business, the reasons can vary, from profit opportunities to changes in your personal circumstances or the need for capital. Preparation and value creation are keys to a successful transition.
What should I do to sell my business?
Selling a business is an important and complex process that requires careful planning and consideration of several aspects. before sale.
Some key steps you can consider when selling your business:
Financial Preparation: Before putting your business up for sale, make sure your financial records are in order and up to date, including financial statements, tax returns, and any other relevant documents that demonstrate the financial health of your business.
Business Valuation: Determine the value of your business, this may involve factors such as assets, profits, future projections and other elements that influence the sales price.
Legal documentation: Prepare all legal documents necessary for the sale, such as confidentiality agreements, purchase and sale contracts and any other document that guarantees the legality and clarity of the transaction.
Marketing and Promotion: Develop a strategy to promote and market your business for sale, this may include creating a sales prospectus, advertising online or in print media and searching for potential buyers.
Negotiation: Once you find an interested buyer, prepare for negotiations, set your expectations and goals, and make sure you are willing to negotiate to reach a mutually beneficial agreement.
Due Diligence: The buyer will likely conduct extensive due diligence, examining your financial records, operations, and other aspects of the business.
Purchase-Sale Contract: Once both parties agree, a sales contract will be drawn up detailing the terms of the transaction, including price, conditions, and deadlines.
Closing: Reach a final agreement with the buyer and close the sale, this involves officially transferring control and ownership of the business to the new owner.
Professional advice: Consider seeking the support of legal, accounting and financial advisors to ensure that the transaction is completed properly and legally.
Transition: Once the sale is complete, work with the new owner to facilitate a smooth transition, this may include the transfer of assets, training the new owner, and transferring relationships with customers and suppliers.
How to value a company?
In the valuation of companies, it is essential to take into account both tangible and intangible assets, currently, intangible assets have a significant value compared to previous years, their importance is notorious, since if they are not considered in the valuation, they could Result in biased or inappropriate valuations of the company, which could sometimes overvalue the company based on tangible assets alone or unfairly undervalue it.
The main reason a business valuation is required is to facilitate the purchase or sale of a company, however, there are other reasons as well, such as planning, reorganization, or to verify its value to lenders or investors.
It is a procedure that is used mainly by investors or businessmen to determine the real value of the shares of a specific company, through this process, the continuous value of the company is estimated over time, based on its historical behavior.
EBITDA of your company
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation & Amortization in English, refers to earnings before taxes, interest, depreciation and amortization, its objective is to offer an accurate representation of the core profits or losses of a company, and although It is not part of a company's official financial report, it provides a quick view of the profitability of a business, it is very useful because this indicator shows the company's ability to generate profits regardless of external factors such as financing or taxes.
ANDl EBITDA It is one of the indicators that we can use to carry out an evaluation based on multiples, although there are more recommended methods to value companies, using EBITDA multiples presents a notable competitive advantage: speed.
The EBITDA multiple compares the value of a company with its operating flow, without considering its financial structure, but nevertheless, its usefulness lies in comparing it with the multiples of other companies within the same industry, not between different sectors.
QFor example, some companies may have valuations that range between 4 and 6 times its EBITDA, while others, especially in most dynamic sectors or growing, could have higher multiples, reaching figures like 10 or more times its EBITDA
How is EBITDA calculated?
The general formula to calculate EBITDA is:
EBITDA = Total Revenue – Total Costs (excluding interest, taxes, depreciation and amortization costs)
EBITDA Multiple = Enterprise Value/EBITDA
Here is the breakdown of the components:
Total revenue: This includes all revenue generated by the company through its core business operations.
Total costs: All operating expenses are subtracted from total revenues, excluding interest costs, taxes, depreciation, and amortization.
The formula to calculate EBITDA eliminates these four elements:
Interest: Interest payments related to the debt.
Taxes: Taxes on profits.
Depreciation: The decrease in value of tangible assets over time due to wear and tear.
Amortization: The reduction in value of intangible assets over time, such as patents, trademarks, or copyrights.
By excluding these elements, we seek to obtain a measure of the pure operating performance of the company, without taking into account financing decisions, capital structure or accounting for long-term assets.
It is important to keep in mind that EBITDA is a financial metric that has its advantages and limitations. Although it can be useful in evaluating operating profitability, it may also not fully reflect a company's overall financial condition.
It is essential to remember that EBITDA is derived from financial records, excluding amortizations that do not involve an actual cash outlay, It is intended to resemble the free cash flow, so it is used as an indicator when valuing a company, however, does not consider investments (CAPEX) nor the working capital (working capital financing), furthermore, does not take into account the future EBITDA that the company expects to achieve, that is, Valuation based on the EBITDA multiple can be viewed as a method to estimate value and confirm a valuation obtained through more robust methods, such as discounted cash flow, but should not be the only valuation method.
Pros and cons of selling a company for the EBITDA multiple
The industry average multiplier represents how high the value of a company is compared to its revenues, it is a common tool in business purchase and sale transactions, as it makes it easier to determine a fair market value for the company involved in the transaction.
There are advantages and disadvantages to selling a business using the EBITDA multiple as a reference, one of the main advantages is that this methodology allows buyers to quickly understand the value of the company based on its historical performance.
Additionally, having an established industry multiplier often simplifies negotiations with potential buyers.
Using an EBITDA multiple for the sale of a company offers an objective and uniform approach to determine its value, being widely accepted by buyers and sellers, this speeds up negotiations by having an agreed upon number as a starting point, the EBITDA, when considering profits, expenses, debts and taxes, is more complete than financial metrics such as gross sales or income, providing buyers with a more accurate view of business performance. Multiples are also useful for investors when performing comparative analyzes between companies, facilitating more informed decisions. on investments, so by using EBITDA multiples, owners can receive maximum value for their company, as profits and expenses from all income sources are accurately calculated.
AND on the other hand selling a company based on a multiple of EBITDA can No accurately reflect its true value, as it does not consider future market conditions and technological changes, metrics such as EBITDA can overlook vital aspects of the business, such as; the customer base and intellectual property, which are relevant to the evaluation, discounted cash flow analysis is usually more effective than using EBITDA multiples, since it considers long-term projections, the choice of multiple can generate disagreements between buyers, prolonging negotiations and resulting in lower offers than anticipated and the seller can easily manipulate the multiple used to increase or decrease the real value of your business for your own benefit.