Consulting for the Sale of Companies and Businesses | Certified Valuation
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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: In the first place, you must be sure of the decision that is about to be executed, since the whole process implies a very large movement, expenses, audits, etc. For this reason, it is complex to stop or cancel it. The process of transferring or selling a business also affects sentimentally, especially if the company is family-owned. You must be completely sure of the sale and have previously evaluated whether it is the best option.
- Preparation and evaluation of the company: It is necessary as point number 1, 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 the 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 clients, use non-disclosure agreements (NDAs) to protect sensitive information.
- Professional advice: Consult with lawyers, accountants and financial advisers and appraisers experienced in business sales, they will help you navigate the process and protect your interests, even negotiate.
- Identification of potential buyers: Search the market for potential buyers through intermediaries, personal contacts or M&A platforms and assess potential buyers for suitability and financial capacity to ensure they are serious candidates, brokers can help you with this process.
- Negotiations and offers: Start negotiations with interested buyers and work to reach an agreement on price and terms of 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 a thorough 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.
- Sales 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 recommended that the lawyers of both parties review the contract to ensure that their interests are protected.
- Closing of the sale: Once all the conditions have been met and the necessary approvals have been obtained, proceed to the closing of the sale, the ownership is transferred and the agreed payment is made, make sure to follow all the 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 transfer of personnel if agreed.
Why sell my company or business?
- Profit Opportunity: If the value of the business has increased significantly since its founding or acquisition, the owner may decide to sell it for 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 a capital injection to expand, invest in new technology 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 declining profitability, the owner might consider selling the business before things get worse.
- Market Changes: Changes in the market or industry may cause the owner to consider selling the business if he sees a decline in demand for his products or services.
- Lack of succession: If the owner does not have a clear succession plan and there are no family members 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 business 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.
- Expansion
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 a significant and complex process that requires careful planning and consideration of several aspects prior to the sale.
Some key steps you can consider when selling your business:
- Financial Preparation: Before you put 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 partial or inadequate valuations of the company, which could sometimes overvalue it based only on tangible assets or undervalue it unfairly.
The main reason a business valuation is required is to facilitate the purchase or sale of a company, however, there are also other reasons, such as planning, reorganization or to verify its value for 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.
There are various methods used in a business valuation such as;
- Discounted flows
- multiples
- Balance
- Goodwill
And among them is a fundamental tool; the EBITDA multiple, valuing companies using the EBITDA multiple is a common practice in the financial field, as it provides a measure of a company's operating performance by eliminating the effects of the capital structure, taxes and investment decisions in fixed assets, which is why when calculating the value of a company, investors often use EBITDA multiples as a way to determine its ability to generate profits before financial and tax factors.
These multiples are often applied to comparable companies in the same industry or sector, providing a basis for relative valuation and helping investors make informed decisions about buying, selling or investing in a specific company.
EBITDA of your company
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation & Amortization in English, refers to the profit 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 the official financial report of a company, 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.
EBITDA is one of the indicators that we can use to perform an evaluation based on multiples. Although there are more recommendable methods for valuing companies, using EBITDA multiples presents a significant 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.
For example, some companies may have valuations ranging from 4 to 6 times their EBITDA, while others, especially in more dynamic or growing sectors, could have higher multiples, reaching figures such as 10 or more times their EBITDA.
How is EBITDA calculated when buying or selling a company?
The general formula to calculate EBITDA is:
EBITDA = Total Revenue – Total Costs (excluding interest, taxes, depreciation and amortization costs)
EBITDA Multiple = Enterprise Value/EBITDA
Breakdown of 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:
- Interests: Interest payments related to debt.
- Taxes: Income taxes.
- Depreciation: The decrease in the 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 note that EBITDA is a financial metric that has its advantages and limitations. Although it can be useful in assessing operating profitability,, may also not fully reflect a company's overall financial situation.
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 free cash flow, which is why it is used as an indicator when valuing a company, however, it does not consider investments (CAPEX) or working capital (working capital financing), furthermore, it does not take into account the future EBITDA that the company expects to achieve, that is, the valuation based on the EBITDA multiple can be seen as a method to estimate the value and confirm a valuation obtained through more solid methods, such as discounted cash flow, but it should not be the only valuation method.
Example How much is your company worth using the EV/EBITDA multiple?
The EV/EBITDA multiple (Enterprise Value over EBITDA) is a key tool in the valuation of companies, especially in sales processes. This indicator allows comparing the value of a company with its capacity to generate operating income, adjusting for the capital structure and financial costs.
Suppose you are valuing a company for sale and decide to calculate its value using the EV/EBITDA multiple. The company has the following financial data:
- Annual EBITDA: $2,000,000
- Net debt: $3,000,000
- Sector EV/EBITDA multiple: 6.0
Step 1: Calculate Enterprise Value (EV)
The EV is obtained by multiplying the company's EBITDA by the sector multiple:
Step 2: Calculate the market value of the company
The market value or potential sales price is obtained by subtracting the net debt from the EV:
In this case, the estimated value of the company for a potential buyer is $9,000,000This calculation, based on an industry multiple, provides an initial benchmark that can be adjusted for company-specific factors such as projected growth, brand, intangible assets, or market conditions.
This method is especially useful for business owners seeking an objective valuation based on industry standards, and can serve as a basis for negotiations with potential buyers.
Pros and cons of selling or buying a company for the EBITDA multiple
| Pros | Cons |
|---|---|
| Allows buyers to quickly understand the value of the company based on its historical performance. | It may not accurately reflect the true value of the company because it does not consider future market conditions or technological changes. |
| Simplifies negotiations by providing a widely accepted benchmark. | It does not take into account key intangible aspects such as the customer base and intellectual property. |
| It offers an objective and uniform approach to determining the value of a company. | Discounted cash flow analysis may be more effective because it considers long-term projections. |
| It considers profits, expenses, debts and taxes, providing a more complete view of business performance. | The choice of multiple can generate disagreements between buyers and sellers, prolonging negotiations and affecting the final price. |
| It is widely accepted by buyers and sellers, which speeds up negotiations. | There is a risk of manipulation of the multiple by the seller to adjust the value of the business in its favor. |
| Helps investors perform comparative analysis between companies, facilitating more informed investment decisions. | You may overlook important qualitative factors that impact the true value of the company. |
| Accurately calculates profits and expenses from all sources of income, maximizing the value obtained by the owners. | Forward-looking statements are not reflected in this methodology, which could result in an undervaluation or overvaluation of the business based on its future potential. |
Is it possible to carry out a valuation of an SME?
Yes, it is absolutely possible and common to carry out a valuation of a small or medium-sized enterprise (SME). Valuing an SME involves determining its financial value, which can be useful in a variety of situations, such as mergers and acquisitions, financing, selling the company, or even to determine the shareholding in the company.
There are several approaches to valuing an SME, including the income approach, the net book value approach, and the market approach.
The income approach focuses on the expected future cash flows of the company, while the net book value approach, also known as Book Value or Book Value, is a financial indicator that represents the difference between a company's total assets and its total liabilities and On the other hand, the market approach uses comparisons with similar companies that have been recently sold.
The choice of valuation method will depend on several factors, including the industry in which the company operates, its life cycle, its historical profitability and its future growth prospects. It is important to have the help of a business valuation professional to obtain an accurate and complete valuation.
Strategies to improve the valuation of an SME
Improving the valuation of an SME involves implementing strategies that increase its financial and operational value.
Some strategies that can help improve the valuation of an SME are:
Revenue growth
Focusing on increasing a company's revenue can have a significant impact on its valuation and can be achieved through acquiring new customers, expanding into new markets, developing new products or services, and improving marketing and sales strategies.
Improved profitability
Improving a company's profitability is essential to increasing its value. This is achieved by reducing costs, optimizing operational processes, negotiating better terms with suppliers and maximizing profit margins.
Efficient management of working capital
Efficient working capital management can free up cash and improve a company's liquidity, which in turn can increase its value. This involves optimizing inventory levels, effectively managing accounts receivable and payable, and minimizing the cash cycle.
Investments in strategic assets
Making investments in assets that generate a significant return can increase a company's valuation, which may include acquiring innovative technology, expanding facilities, or investing in research and development to improve competitiveness and future growth.
Development of intangible assets
Intangible assets, such as brand, reputation, intellectual property and customer relationships, can have significant value to a company, and investing in developing and protecting these assets can increase their valuation.
Talent management
Having a strong and engaged talent team can improve a company's ability to execute its strategy and deliver results, this can include recruiting and retaining key employees, developing skills and creating a positive work environment.
Transparency and regulatory compliance
Maintaining accurate and transparent financial records, as well as complying with all applicable regulations and rules, can increase investor confidence and improve the company's valuation.
By implementing these strategies effectively, an SME can improve its valuation and better position itself for long-term growth and success.
Importance of valuation for SMEs
Valuation of an SME is essential for several crucial reasons that impact both its present and future. Firstly, it provides an objective and quantitative assessment of the company's financial value, helping owners, investors and potential buyers understand its true potential and position in the market.
Furthermore, valuation enables owners to make informed decisions about financing, expansion, sale or business succession, by providing a solid basis for negotiation and strategic decision-making. In addition, an accurate valuation can enhance the credibility of the company with investors, lenders and other stakeholders, which can facilitate access to capital and growth opportunities. Ultimately, the valuation of an SME is essential to maximize its value and ensure its long-term viability in an increasingly competitive and dynamic business environment.
