Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

July 16, 2013

Business Seller’s Price Expectations

By Joseph Eneldas

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Very often, a business owner’s price expectation for the sale of a business is substantially “off the mark” – interestingly enough though, these misestimates occur in both directions – under and over! In less than 10% of all scenarios are the expectations consistent with what the Fair Market Valuation subsequently determines, or with what an investor is truly willing to pay. Why is this?

“One of the key reasons for a consistent ‘overvaluation’ is the seller’s expectation for the buyer to pay for future improvements in business performance – either due to changes in the general economic or specific market niche conditions or due to a future owner’s changes in the business structure”, says Achim Neumann, President, A Neumann & Associates, LLC, a New Jersey – based merger & acquisition and business brokerage firm.

Generally speaking, however, investors are not willing to pay for expected future improvements, most certainly not the last one, simply because the investor argues that if he / she needs to implement the changes, then credit should not go to the previous owner. Alternatively viewed, if the potential for an improved business structure is indeed available, then the (current) business owner should make the changes first and then sell the business.

“There are exceptions, though,” says Michael Gersten, Managing Director, Northern New Jersey & Southern NY State. “If there is a justified expectation of a market improvement, then both parties can agree on a deal structure that takes such improvements into account. We have successfully put many such deal structures into place, however, such business improvement needs to be due to external events, and not due to the (new) owner’s willingness to make substantial changes to the business.”

The challenge for many business owners then is accepting a more realistic asking price. Indeed, after performing a Fair Market Valuation by an accredited third party valuation firm, an “outsider’s view” will most certainly move expectations to a more realistic value, specifically, with respect to two factors: goodwill and deal structure.

Goodwill, often perceived as a nebulous concept, is actually a factor that can be fairly easy determined, by comparing the existing cash flow and the market based company value with it’s asset base. “We have provided over 500 valuations over the past ten years, and every one had a fair market determination of the goodwill, ’” says Gary Herviou, Managing Director Central NJ & Lehigh Valley.

More challenging is the deal structure, which often contributes to unrealistic price expectations. As mentioned before, if there are expectations for a substantial improvement in the business climate, then  the deal structure has to take this into account.

Beyond that, however, several other factors come into play. For example, the lack of a seller note will typically drive down the FMV of the transaction by 10% to 30%, even though, in many transactions the seller note will ultimately never be used.

A second factor, such as the current low interest rates available from the SBA, will allow for a higher ROI for the investor and therefore for a higher transaction price. As recently reported, “Small-business lending activity is on the rise, but the size of loans is shrinking, new data shows. The total number of small-business loans jumped up 10.4% last year, according to a report released Wednesday by the U.S. Small Business Administration’s Office of Advocacy.” [The Wall Street Journal, July 15, 2013]

Such increase in lending is very often an outcome of low interest rates, which in return provides for a more favorable deal structure and subsequently more deal flow.

“All in all, there are many factors that contribute to the determination of a Fair Market Value of a business,” says Neumann, “and it is truly unrealistic to expect a business owner to sort out all these factors. Using an accredited third party professional’s opinion and relying on M&A professionals active in the field on a daily basis, is certainly the more prudent way to go.”

 


About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional merger & acquisition and business brokerage firm with 30 years of experience in New Jersey, New York, Pennsylvania, Delaware and Maryland that assists business owners and buyers with the business transfer process in a completely confidential manner. The company is affiliated with BBN, with 450 offices and access to a national network of qualified buyers and sellers. For more information, please contact A Neumann & Associates at 732-872-6777.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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Andrey O, Investor

“Finally enjoying retirement after recently selling my business using the services of A Neumann & Associates. Joe Oddo provided the conduit to a successful transaction. Joe knew when to inject input and when to simply listen and allow the buyers to vent, step back and regroup. The outcome met our expectations and got us to the finish line, which included my staying with the company six months in order for the buyers to get their footing and keep our workforce in the loop. He helped at every step by providing his expert guidance & resources. Thank you!”

Emily Parker Myers, Co-Owner - Myers McRae

“I had been in touch with Karin and Gary from A Neumann & Associates regarding some opportunities and was looking forward to meeting with them. Hence, when they organized a seminar in Princeton, NJ, I was quick to sign up. The seminar was very informative as the team walked the attendees through various scenarios and referenced real life buying/selling situations they had been through. The sessions by Gary, Karin and Achim were crisp and focused and brought clarity to potential seller and buyers. I strongly recommend the team and look forward to continue working with them.”

Gaurav Tyagi

“Thank you for your Event on "How to value, Sell, and Buy A Business for Maximum Profit" and the insight into ANA’s approach on what is involved in the Business Exit for sellers. Garys Hervieiou's "Business Valuation", Achim's "Deal structure" presentation and Karin’s "Preparing the Package" are real street knowledge shared. They answered attendees questions which makes it more interesting for learning from others. Great for small businesses like us. The presentations were totally worth our time and travel for the event to Princeton, NJ from Rockville MD. Ravi Bhutani, President, CIPS”

Ravi Bhutani

“Gary, this is to thank you for an excellent job done in selling our business. We could never have done it without your professional expertise, dedication and time put in without reservation to make it happen. We will gladly and highly recommend you to anybody in our position.  It was a pleasure to work with you.”

Pat Iammatteo, Owner

“Your vetting is simply outstanding, among the best I've seen from a broker.”

Eric H., Investor

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

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