Valuing and Selling Your Entrepreneurship

By Alan Walsh, 7/10/2011

You’ve spent time & money, and taken risks, developing a successful entrepreneurship.  For reasons of your own (usually upcoming retirement), you’re thinking of selling it.  You have the vision of making a nice pile of money.

You’re probably going to be disappointed.

First, you’ve probably got an inflated value in your mind.  Most do.  Second, the form of sale probably won’t take place the way you envision.

All of this, of course, assumes your business is sellable.  Many aren’t, for a variety of reasons.

If you have a stock company, you probably envision making a simple stock sale.  Unless your company’s public, it probably won’t happen that way.  The most likely scenario is that the buyer will want to do an asset purchase. They buy the assets, and leave you with all the liabilities (accounts payable, debt, legal obligations, etc.) to deal with. They do this for simple reasons.  It can be very difficult and expensive conducting due diligence to identify all of the real and potential liabilities; especially for a private company.  They don’t want to buy the firm and then get a nasty surprise.  For instance, you might have a legal issue open that hasn’t been litigated yet.  Finding issues like that, when the owner’s hiding them, can be a daunting challenge.  It’s easier to just buy the assets and let you worry about all those nasty obligations.  This type of purchase usually simplifies the buyer’s tax issues.  It also resolves common-sense issues; such as the business owner who tries to drain all the cash and valuable assets out of the business prior to the transfer of ownership.  The sale contract will inevitably contain a clause to adjust the price tag for changes in assets between deal-time and ownership-transfer time.  Less assets – less payment.

Conversely, assets are much easier to analyze and value; although most entrepreneurs contemplating selling tend to inflate the value in their minds.  Cash can be handled at face value.  Hard assets, such as facilities and equipment, can be fairly market-assessed by an independent professional.  The whole issue of “soft assets”, such as the company’s customer base and earning capability (all that stuff that falls under the category of “goodwill”), can be handled via a simple formula based upon projected sales & profit; looking at the last couple of years performance.  There might be special items such as patents and copyrights.  Valuation of these items largely becomes a function of the buyer’s eagerness to acquire them (in some cases, these may be the only assets they’re really interested in).  This is usually your brightest prospect for negotiation.  Usually this is factored into the sales-based formula mentioned above.  After all, the whole issue for the buyer is the ability to generate sales & profits as new owner.

Accounts Receivable are usually handled on a discounted basis whereby there is partial payment up front, and then a final settlement after a period of time; typically 90 or 180 days.  If the buyer can collect the A/R, you as seller will get paid.  If not, the uncollected A/R will be handed back to you; and you might even have to make a payment to the seller.

Take these factors into account, and the final price tag the buyer’s willing to pay will probably be much lower than your “greedy capitalist” mind envisioned.  You’ll also be responsible for settling all debts, and collecting any open A/R.

If you’re one of the fortunate few who possess a “hot commodity”, such as the season’s hot new video game, then your negotiating power can go up.    In such cases, the buyer might be willing to pay a more inflated price.  We’ve all heard stories of businesses selling for inflated values based upon their perceived prospects.  Most businesses don’t fit this model.

Remember that buyers are usually looking for “bargains”, i.e.:

• Troubled companies that they can buy cheap and fix easily
• Companies with seriously  undervalued assets
• Cash-rich companies (nothing like buying you with your own money)

Before you contemplate a sale, you should consult with people who can help you determine the company’s marketability and value.  Don’t go into discussions unprepared.  Do your homework.