Justifying a Sale Price

In a recent banking and finance article in NJ Biz, we underscored the changing attitudes of business owners toward more realistic values for their businesses. “I think everybody recognizes that the market is not going to go back to the crazy days of 2007,” said Achim Neumann, President, A Neumann & Associates. “This trend is also being experienced at our firm’s offices.”

A Neumann & Associates will have five field offices in place by this Fall, ranging from Eastern Pennsylvania/Lehigh Valley, to Long Island, to Northern New Jersey/Southern New York.  Southern New Jersey and the Metropolitan Philadelphia will be served by Steve Wrubleski, recently appointed Director Marketing at the company.

Accuracy has always been the hallmark of the firm when it comes to valuations. A consistent and rigorous standardized business preparation process is followed at each of the firm’s offices, and this is key to ensuring that Fair Market Valuations correctly reflect the true market value of a business. As Gary Herviou, Director Marketing, Central NJ, comments, “It’s important to capture all aspects of a business’ cash flow, even if this is not immediately apparent on the company’s tax returns. And this applies to both Strategic Valuations and Transaction Valuations.”

Essentially, the preparation process serves the purpose of discovering inconsistencies in a business’ financial reporting systems, thus, alerting a business owner early to a situation that needs improvement prior to presenting the business to potential buyers. “It’s very important to us that the presentation to a buyer shows a true picture of a business, and that is the reason we spend so much time during the preparation phase,” says Mike Gersten, Director Marketing, North New Jersey-Southern New York, “if we find inconsistencies or erroneous information later on, buyers rightfully abort the purchase of a business.”

So how does one justify the sale price? First, all information and federal tax returns for the past three years are captured during a confidential, one-to-one meeting with a business owner, with no employees in attendance. An initial recasting is prepared and reviewed with the business owner, and if correct, the information is provided to a national, accredited valuation firm for a full valuation report.

“Our firm only utilizes external, qualified valuation firms and would never position itself into a conflict-of–interest situation by internally developing valuations,” says Neumann, “a business broker’s internal valuation never serves a business owner properly. It is an inherently faulty practice that business owners should be very wary of.”

The subsequent valuation draft report that is presented to the business owner contains various charts, analyses and comparisons, including a price justification chart. “It’s this chart where the ‘rubber meets the road’”, says Herviou, “it clearly spells out the return on investment for a buyer and very quickly determines if the proposed value indeed will be attractive to an investor.”

Having performed hundreds of valuations for its clients followed by many deal closings over the past ten years, the firm has a keen sense for what buyers are willing to pay and how they prefer to see the valuation information presented. Justifying a sale price is of paramount importance to a seller if a successful sale is to be achieved.