What is Your Business Worth? Roadmap to Help Determine Value of a Privately Owned Business
The sale of a business is an emotional, life-changing event and determining its true value is a crucial first step in any sale process. Also, business owners may have a preconceived idea of what their business is worth and their value expectations may vastly differ from those of prospective acquirers. So, business owners need to be prepared and know their next move if approached by a potential buyer or have a plan if they are contemplating exiting their business in the near future. The bottom line is that the notion of “value” is fluid in nature and demands an understanding of what the business is worth to a potential acquirer as opposed to what it is worth to the owner. Let’s proceed with the steps to determine value.
Three Generally Accepted Methodologies for Valuing a Company
When working with a trusted investment banking partner, the deal team will utilize a subset − or all − of the following valuation methodologies to determine company value, all having benefits and challenges:
1. Precedent Transactions Analysis – This method estimates the implied value of a business by analyzing recent acquisition multiples paid in comparable transactions.
2. Comparable Company (Comps) Analysis – This approach leverages valuation multiples of publicly traded companies to derive the valuation of a privately owned business in the same or similar sector.
3. Discounted Cash Flow (DCF) Analysis – This method values a business by forecasting its future underlying free cash flows and discounting them to their present value.
Factors Impacting Valuation and Key Considerations
While theoretical valuation methods, as presented above, set the basis for estimating the potential purchase price of a business, various other factors – external and internal – will impact the ultimate transaction value.
External factors encompass overall economic outlook, geopolitical circumstances, specific market/industry conditions, general M&A activity as well as the availability and terms of financing, among others.
Internal or company-related factors include attributes, such as revenue/profit size, stickiness of revenue, margin profile, growth history, depth of management, nature and dependency from customer and supplier base and competitive advantages. A synopsis outlining critical business aspects and associated buyer considerations is presented in the following table:
Industry Sectors in Demand
The table below provides an illustrative list of sectors that have witnessed resilient M&A activity and healthy valuation multiples over the past few quarters. Sectors in favor include companies with strong end markets, tangible growth opportunities, visibility of earnings, ongoing consolidation strategy and attractive free cash flow and margin profile.
Premium Valuation for High-Performing Businesses
A strong financial profile is one aspect which will positively affect the value of a business. Specifically, the “quality premium” is the reward in valuation for above-average financial performance which in the analysis herein is defined as companies with revenue growth rates and EBITDA margins above 10 percent for the trailing 12-month period (or one above 12 percent and the other metric at least eight percent). In 2023, above-average performing companies received a 28 percent greater EBITDA multiple compared to those that did not meet these criteria.
One Final Consideration – Selecting the Right Investment Banking Advisor
No matter what valuation approach is used, or attributes a company possesses, the main takeaway remains: a business is only worth as much as someone is willing to pay for it. A healthy pool of potential acquirers ensures competitive tension in a deal process – often driving up the valuation of the target company. An experienced investment banking advisor should define the appropriate type of process for the business, obtain a higher value and significantly increase the odds of closing a successful transaction than any business owner could accomplish on his or her own.
Contact Us
Alberto Sinesi
Director
PKF Investment Banking
asinesi@pkfib.com | 203.273.5024
Robert Murphy
Senior Managing Director
PKF Investment Banking
rmurphy@pkfib.com | 201.788.6844
About PKF Investment Banking
PKF O’Connor Davies Capital LLC (DBA PKF Investment Banking) is a subsidiary and investment banking affiliate of PKF O’Connor Davies Advisory LLC. Securities-related transactions are processed through an unaffiliated broker-dealer, Burch & Company, Inc.
Whether a business owner is ready to sell the company or seeking growth through acquisition, our investment banking team is committed and credentialed to help owners achieve their objectives. PKF Investment Banking provides guidance through every step of the process and brings the expertise to enhance certainty to close – while always staying focused on maximizing the value derived from the transaction.
With deep expertise in and a dedicated focus on advising privately held middle-market businesses, the PKF Investment Banking team has completed over 300 M&A and capital raise engagements in North America and abroad during their careers. Our key services include sell-side and buy-side M&A advisory, exit readiness and transaction planning. For more information, visit www.pkfib.com.
PKF Investment Banking provides this report for information purposes only and it does not constitute the provision of financial, legal or tax advice or accounting or professional consulting services of any kind.
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Get the Right Value – Don’t Do It Alone with One Buyer
Financial buyers deploy significant resources to contact private companies to purchase a company below its true market value. Before agreeing to sell, here are some important Do’s and Don’ts for sellers to consider.
As a Seller: Questions You Might Ask Yourself
- Why would any buyer pay the high end of their value range or offer their best terms if there’s no competition and/or no knowledgeable M&A advisor negotiating on behalf of the seller? The fact is: no unchallenged buyer would pay top dollar.
- Should you directly negotiate the value and major deal points in the sale of your company? No, this is not your expertise and selling your business is probably the most important financial transaction of your life. You need an advocate with decades of M&A experience.
- Should you sell your company to a buyer who has approached you and this is the only offer you have? Maybe, but is there certainty to close? Is it the best fit available? Can value and terms be improved, or will another buyer pay more or be a better fit for you and your company?
- Should you pay a full M&A advisory fee on a deal where you are already talking to a qualified buyer? No, you shouldn’t. In this situation, our firm may negotiate only with the existing buyer and would adjust our fee accordingly. However, if we contact other buyers, and a deal is done with one of them, then yes, a full fee is warranted.
Call a Specialist
Despite ongoing macroeconomic uncertainties, 2023 is expected to offer strong demand from buyers for companies in the lower middle market (under $200 million in annual sales). Various types of buyers, especially private equity firms, will no doubt be contacting you to express interest in acquiring your business.
Before you respond to these inquiries, check with us. PKF Investment Banking can help drive up value, improve terms and evaluate fit and certainty to close. We do this by being your advocate, knowing the market and, when appropriate, quickly and confidentially contacting a select group of additional buyers.
With a high-quality M&A advisor in the picture, the “one-buyer” is presented with the possibility that we will run a full marketing process if he or she is not willing to agree to the deal that is right for you.
Reaching a Better Deal
Here are two examples of “one-buyer” deals we negotiated:
- The deal already on the table with a qualified buyer was improved by 20% and then closed within
60 days. - The deal already on the table had a value that we deemed was too low. After an efficient
marketing process, the original buyer improved their offer, yet ultimately lost out to another buyer
who was not only a better fit but paid a higher value by several million dollars.
Team Up with Pros
Our investment banking team is comprised of senior-level professionals with decades of M&A experience across a range of industries. We’re not cookie-cutters − our approach is tailored to each engagement. Our commitment is to be your trusted advocate.
Without competition or proper M&A advisory representation, selling to a buyer on your own can result in money left on the table and/or deal terms that fall short of what you should be receiving. We can help to ensure you obtain the best value and terms.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfib.com
561.337.5324 | 201.788.6844
About PKF Investment Banking
PKF Investment Banking is the investment banking affiliate of PKF O’Connor Davies. Whether a business owner is ready to sell the company or seeking growth through acquisition, our investment banking team is committed and credentialed to help owners achieve their objectives. Our investment bankers provide guidance through every step of the process and bring the expertise to enhance certainty to close – while always staying focused on maximizing the value derived from the transaction. The PKFIB team has closed over 200 successful M&A transactions across many industry verticals.
Securities-related transactions are processed through an unaffiliated broker dealer, Burch & Company, Inc.
PKF O’Connor Davies, LLP is a full-service certified public accounting and advisory firm with a long history of serving clients both domestically and internationally. With roots tracing to 1891, the Firm has 19 offices in the United States and abroad with more than 1400 professionals who provide a complete range of accounting, auditing, tax and management advisory services.
Our Firm provides the information in this e-newsletter for general guidance only, and it does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind.
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PPP Loan Guidance When There’s a Change of Control
Questions remain, but it’s time to move forward
When it comes to merger and acquisition activity, 2020 may very well become the year of “two halves.” After a significant decrease in M&A activity as a result of the pandemic in the first half of the year, we’re now seeing a notable increase in deals. According to Mergermarket, M&A activity in the U.S. declined 65% in deal value from Q1 to Q2 and roughly 45% in number of deals. More recently, between Q2 and Q3, M&A activity increased by 400% in deal value, with 1,036 deals totaling $402 billion.
With M&A activity on the rise, it’s important that buyers and sellers familiarize themselves with potential restrictions to a change in ownership and the related requirements of PPP Borrowers if a merger or combination of entities is contemplated or in the works.
PPP Loan Restrictions
With over 5 million companies receiving Paycheck Protection Program (PPP) loans (of these, more than 650,000 received loans exceeding $150,000 according to the U.S. Treasury), Buyers and Sellers contemplating a transaction were unsure how to address these loans, which resulted in different approaches. Adding to the confusion were different interpretations by Lenders and advisors of language in the PPP loan application regarding “change of ownership” restrictions.
On October 2, 2020, the Small Business Administration (SBA) issued a Procedural Notice providing guidance concerning the required procedures for changes of ownership of an entity that has received PPP funds. Included in the Notice is clarification that there are no restrictions on a change of ownership if:
- Prior to closing the sale or transfer, the Borrower has either repaid the PPP note in full or completed the loan forgiveness process.
- The SBA has remitted funds to the PPP Lender in full satisfaction of the PPP note or the PPP Borrower has repaid the portion of the loan that was not forgiven.
Definition of “Change of Ownership”
The SBA defines a change of ownership when the following occurs (in one or more transactions since the PPP loan was approved):
- At least 20% of the common stock or other ownership interest of the PPP Borrower is sold or otherwise transferred, including to an affiliate or an existing owner of the entity;
- The PPP Borrower sells or otherwise transfers at least 50% of the fair market value of its assets;
- A PPP Borrower is merged with or into another entity.
Required Notifications and Approvals
The PPP Borrower must notify the PPP Lender in writing of any contemplated change in ownership and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the transaction prior to the closing of any change in ownership.
When the PPP note is not fully satisfied, the PPP Lender may approve the change of ownership without prior approval of the SBA in these cases:
- The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP Borrower; or
- For sales of 50% or more of the stock or 50% or more of the fair market value of the PPP Borrower’s assets, the PPP Borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it with any required supporting documentation to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.
SBA prior approval is required for sales exceeding 50% or more of the stock or assets if a PPP Borrower is unable to establish the required escrow account. In addition, the PPP Lender must include the following information when submitting a request to the appropriate SBA Loan Services center:
- Reason why the PPP Borrower cannot fully satisfy the PPP note or fund the escrow;
- Details of the transaction;
- Copy of the PPP note;
- Any letter of intent and the purchase or sales agreement setting forth the responsibilities of the PPP Borrower, Seller, and Buyer;
- Disclosure about the Buyer’s existing PPP loan (if any); and
- List of all owners of 20% or more of the Buyer.
The SBA will review and provide a determination within 60 calendar days of receiving a completed request and may require additional measures as a condition of its approval. Noteworthy in an asset transaction is the SBA’s requirement that the Buyer assume all of the PPP Borrower’s obligations, including responsibility for compliance with the PPP loan terms. The assumption of these obligations will need to be included in the purchase and sale agreement or submitted to the SBA in a separate assumption agreement.
Continuing Obligations
Even if the transaction is structured as a stock sale or merger, the PPP Borrower will remain subject to all obligations under the PPP Loan. Furthermore, the SBA stated it will have recourse against the original owners for any unauthorized use of PPP funds by the new owners.
If a purchaser or new owner has a separate PPP loan, the SBA noted that the PPP Borrower and the new owner are responsible for segregating and delineating PPP funds and expenses for each Borrower and demonstrating compliance with PPP requirements with respect to both PPP loans.
Snapshot of SBA Notice
While not providing all of the answers, the SBA Notice does clarify these important matters:
- Sellers do not have to accelerate the forgiveness application process, especially if they are still expending funds on qualified expenditures in the 24-week covered period.
- More than one PPP Loan may be outstanding after the completion of a transaction.
- Buyer’s will be required to assume the PPP Borrower’s obligations with the SBA in a transaction structured as an asset sale (i.e., 50% or more of the fair market value of the assets). As a result, Sellers should expect additional indemnifications and, likely, an escrow of sales proceeds.
- PPP lenders may approve a change of ownership without prior SBA approval in certain situations.
Contact Us
Robert Murphy
Senior Managing Director
rmurphy@pkfod.com
561.337.5324 | 201.788.6844