I wanted to talk about bit about the list potential buyers that can be developed. During this process the advisor’s knowledge of the mergers and acquisitions marketplace will be extremely valuable. Your advisor should have a feel for which buyers are actively pursuing investment opportunities and a good sense of the attractiveness of your particular industry segment to such investors. Potential buyers usually fall into one of the following categories:

1. Individual buyer
This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation. The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time. The individual buyer will hit a strong bottom line when it comes to price. Therefore, these buyers will usually limit themselves to transactions involving less than $1 million cash.

2. Strategic buyer
This buyer is usually a company, having as its goal entering new markets, increasing market share,
gaining new technology, or eliminating some element of competition. In essence, it is part of this buyer’s
“strategy” (hence the name) to acquire other businesses as part of a long-term plan. Strategic buyers can be either in the same business as the company under consideration, or a competitor.

3. Synergistic buyer
Synergy means that the joining of the two companies will produce more, or be worth more than just the sum of their parts. Example: A large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases.

4. Industry buyer
Sometimes known as “the buyer of last resort”, this type is often a competitor or a highly similar
operation. This buyer already knows the industry well and, therefore, does not want to pay for the expertise and knowledge of the seller. These buyers will pay for assets (but probably not what the seller thinks they are worth); they will not pay for goodwill, covenants not to compete, or consulting agreements with the seller.

5. Financial buyer
Financial buyers are generally influenced by a demonstrated return on investment, coupled with
their ability to get financing on as large a portion of the purchase price as possible. Working on the theory
that debt is the lowest cost of capital, these buyers purchase businesses with the sole purpose of making
the maximum amount of money with the least amount of their capital invested.

Back in January, I wrote about learning what your business is worth to have a benchmark. GLM has done 5 valuations since then and "Re-Valuations" since then. Most of the businesses have gone up in value since the original one was done.
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The value assessment driver of any business is the ability of the entity to generate future cash flow
or earnings. Business appraisers will assign an appropriate capitalization rate (or multiple) to a
selected earnings stream to derive an overall value for a business. The value of the net assets of a business is compared to the cash flow valuation and may be adjusted upward or downward. For example, if the earnings based valuation is less than the net asset value, an upward adjustment may be in order.
Conversely, if the net assets are negligible, a downward adjustment is more likely to occur.

Many appraisers typically use a common range of multiples to arrive at a “ballpark” indication of value (for
example, 4 to 6 times EBITDA). While this approach is commonplace it is not an accurate valuation and an in-depth valuation of the company will show the true position. There are too many intangible factors to
consider relying solely on the capitalization of earnings. Of course, the ultimate value of a company
will be determined by the marketplace. This will generally differ from a seller’s expectation, as well
as the expectations of potential acquirers.

It is not uncommon for business owners to have an inflated sense of value of their company. This is due to a variety of factors including emotional attachment to the business, unwillingness to accept the impact of the risk factors facing the business, outside influence from previous market conditions, incorrect conclusion of normalized earnings, comparable transactions, etc. Conversely, acquirers often undervalue businesses. In their quest to “buy right” they often, end up paying a lower multiple for a company with serious negative factors, while passing up on higher multiple opportunities, which, due to the quality, are actually the best buys. A business valuation is a complex process. Owners and buyers will be in a better position if they rely on professional advisors such as their accountants, business appraisers, intermediaries or investment bankers.

Know as you go
While valuing a company is not an exact science, it is also not a total mystery. Valuation is an art practiced by experienced financial professionals. Given the complexities of analyzing all the direct and indirect factors influencing a company’s value, it is often a good wise investment to have a third party valuation or appraisal by an accredited valuation analyst. Having this information prior to going to market drastically enhances your chances of selling at the best possible time and price.