5 M&A Myths and How to Deal with Them

Where your money is concerned, myths can do damage.  A recent Divestopedia article from Tammie Miller entitled, Crazy M&A Myths You Need to Stop Believing Now, Miller explores 5 big M&A myths that can get you in trouble.  Miller points out that many of these myths are believed by CEOs, but that they have zero basis in reality.

Myth 1

The first major myth Miller explores is the idea that the “negotiating is over once you sign the LOI.”  The letter of intention is, of course, important. However, this is by no means the end of the negotiations and it is potentially dangerous to think otherwise.  The negotiations are not concluded until there is a purchasing agreement in place. As Miller points out, there is a great deal that can go wrong during the due diligence process.  For this reason, it is important to not see the LOI as the “end of the road.”

Myth 2

Another myth that Miller wants you to be aware of is that you don’t have to take a company’s debt as part of the purchase price.  Many business brokers, such as Miller, recommend that buyers don’t take seller paper.

Myth 3

A third myth that Miller explorers is a particularly dangerous one.  The idea that everyone who makes an offer has the money to follow through is, unfortunately, simply not true.  Oftentimes, people will make offers without securing the money to actually buy the business.  No doubt, this wastes everyone’s time.  As the business owner, it can derail your progress.  If you are not careful, it could actually prevent you from finding a qualified buyer.

Myth 4

Another myth is built around the notion that sellers don’t need a deal team in order to sell their business.  Again, this is another myth that has no real foundation in reality.  While it may be possible to sell your business without the assistance of an experienced M&A attorney or business broker, the odds are excellent that doing so will come at a price.  According to Miller, those working with an investment banker or business broker can expect, on average, 20% more transaction value!

Additionally, there are other dangers in not having a deal team in place.  A business broker can handle many of the time-consuming aspects of selling a business, so that you can keep running your business.  It is not uncommon for business owners to get stretched too thin while trying to both run and sell a business and this can ultimately harm its value.

Myth 5

Miller’s final myth to consider is that you must sell your entire business.  It is true that most buyers will want to buy 100% of a business, but a minority ownership position is still an option.  There are many reasons to consider selling a minority stake, so don’t assume that selling your business is an “all or nothing” affair.

Ultimately, Miller lays out an exceptional case for the importance of working with business brokers when selling or buying a business.  Business brokers can help you avoid myths.  In the end, they know the lay of the land.

Copyright: Business Brokerage Press, Inc.

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What is the Value of Your Business? It All Depends.

The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered.

  • Does an owner need to know for estate purposes?
  • Does the bank want to know for lending purposes?
  • Is the owner entertaining bringing in a partner or partners?
  • Is the owner thinking of selling?
  • Is a divorce or partnership dispute occurring?
  • Is a valuation needed for a buy-sell agreement?

There are many other reasons why knowing the value of the business may be important.

Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, if a business partner is selling half of his business to the other partner, the departing partner would want as high a value as possible.

In the case of a business loan, a lender values the business based on what he could sell the business for in order to recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate or other similar assets.

In most cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value, normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.

It is interesting that in the most common definition of value, it starts off with, “The price…” Most business owners, when using the term value, really mean price. They basically want to know, “How much can I get for it if I decide to sell?” Of course, if there are legal issues, a valuation is also likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells, there really isn’t a price.

The International Business Brokers Association (IBBA) defines price as; “The total of all consideration passed at any time between the buyer and the seller for an ownership interest in a business enterprise and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment, and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options or stock redemptions, real estate, leases, royalties, earn-outs, and future considerations.”

In short, value is something that may have to be defended, and something on which not everyone may agree. Price is very simple – it is what something sold for. It may have been negotiated; it may be the seller’s or buyer’s perception of value and the point at which their perceptions coincided (at least enough for a closing to take place) or a court may have decided.

The moral here is for a business owner to be careful what he or she asks for. Do you need a valuation, or do you just want to know what someone thinks your business will sell for?

Business brokers can be a big help in establishing value or price.