Legal Developments

Selling A Small Business: Putting A Value On Your Life’s Work

It seems like every day the economic news in the United States becomes more and more encouraging. With this improvement and interest rates continuing at historic lows, more and more of our small business clients are coming out of their recession shell, seeing the value of their businesses increase, and asking the question: “Is now the time to sell?”

One of the most challenging things about selling a business is valuing it to sell. Sure, you can take a simplified approach by looking at how many times yearly earnings businesses in your field are selling for and make your own rough calculations. However, how do you identify and quantify other sources of value such as real estate, intellectual property, business goodwill, and other intangibles? And do you have time to do that legwork yourself while running your business? In these circumstances, it is best to couple legal counsel with a valuation provider.

When valuing a business, there three generalized types of service providers. There will always be some overlapping of services depending on the professional you employ.

1. CPA firm or Valuation Professional: CPA firms usually have a valuation department or a person in their office with expertise in valuation, especially on the accounting side. Either the firm or the valuation professional will generate a report for you to use in your negotiations with a potential buyer. This is normally done on a flat fee basis.

Benefits: These valuations tend to be data driven and provide a neutral evaluation of the value of your business.

Disadvantages: The CPA firm or the Valuation Professional usually will not represent you in the sale, and they may not be able to factor in some of the intangibles that all small business owners know are part of the business but do not translate well to a spreadsheet.

Conclusion: It is hard for a buyer to dispute solid numbers. Legal counsel can fill the gaps provided by this service by picking up the legal aspects of the sale, drafting contracts, etc. A business savvy attorney can also monetize those intangibles as part of the negotiation process, showing the value of those non-spreadsheet assets to a potential buyer.

2. Private Equity or Business Broker: These organizations often do valuation for you as part of the representation and take a commission on the sale of the business.

Benefits: They are salesmen and they are out there to get you the best price you can get. They are especially good when you do not already have a buyer in mind, because they (most of the time) do the search and marketing/promotion of your business on your behalf.

Disadvantages: They are less necessary when you already have a buyer, and may complicate or kill the transaction in their zeal to get the best price (and the highest commission). They also often use a simpler or fluid approach to valuation, which is much less data driven than a CPA firm or valuation professional. The commission at the end could take a serious chunk of your after sale proceeds. Also, depending on the size of your business (its value), some private equity firms will not take the representation because it fails to meet their minimum deal “threshold”. The level of customer service you get is likely to be closely linked to the lucrative nature of the potential sale.

Conclusion: Marketing can prove to be a headache, especially when you are trying to run a business. If you have a niche offering requiring special exposure to generate buyer interest, this option may be your best choice. While equity firms and business brokers usually come to the table with their own pre-drafted contracts, you still need legal counsel to review the terms of the deal, the broker’s proposed contracts, etc. 

3. Business Consultant: A business consultant is going to do a mix of both what the previous two choices offer. Depending on the consultant’s background and expertise s/he could handle the valuation and the negotiation of the business sale, with the parties’ attorneys reviewing the final contract.

Benefits: Business consultants tend to be a lot cheaper since they usually charge by the hour or flat fee by the transaction. While it depends on the consultant, you usually get a person who has owned and/or sold a small business(s) of their own and knows the pitfalls associated with the transaction. If you have a buyer in mind, this is a really good way to go. Unlike the CPA, the consultant, being business owner himself, is in a unique position to understand the value of intangibles and the seller’s emotional connection to the business. The consultant is usually non-confrontational and trained/experienced in negotiation which is of great value in a transaction.

Disadvantages: If you do not have a buyer, the consultant may not have the contacts that the business broker or private equity has. Depending on the consultant’s resources or experience level, the sale proposal or value number generated may not be as rigorous, data wise, as the CPA firm.

Conclusion: This option is best suited for a small company with an already interested buyer. It tends to be the most affordable and non-adversarial. The buyer and the seller are usually very close to the negotiation and the Consultant acts as an intermediary to the parties, guiding them to a mutually acceptable completed transaction

In summary, the process of selling a business requires the small business owner to make his business open to the prying eyes of outsiders. This can be a very difficult and trying time for someone who has built their company from the ground up. For more information or assistance, please contact our office to discuss ways we can help.  Our experienced attorneys can help guide you through every step of the sale of your business.

For more information on this topic, please contact our office at (619) 238-1712 to speak with one of our business attorneys.

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