The first way is to have your accountant take a look at your accounting procedures and make recommendations on how to improve them. He or she may also help in preparing financial projections for the coming year(s). Getting your company’s financial house in order is very important in establishing the value of your firm.
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Economic fluctuations over the past decade have caused many business owners to focus on their cost structure and run a more lean enterprise. This effort has resulted in many companies making better margins and becoming more profitable even with a flattened revenue stream. But there comes a point when there are no more costs to be cut and, if the company is to continue to improve, the focus has to return to growing revenues. The question is: are your current financing arrangements capable of supporting that growth?
Two businesses could report the same numeric value for earnings but that doesn’t always tell the whole story. As it turns out, there is far more to earnings than may initially meet the eye. While two businesses might have a similar sale price, that certainly doesn’t mean that they are of equal value.
In order to truly understand the value of a business, we must dig deeper and look at the three key factors of earnings. In this article, we’ll explore each of these three key earning factors and explore quality of earnings, sustainability of earnings after acquisition and what is involved in the verification of information.
Key Factor # 1 – Quality of Earnings
Determining the quality of earnings is essential. In determining the quality of earnings, you’ll want to figure out if earnings are, in fact, padded. Padded earnings come in the form of a large amount of “add backs” and one-time events. These factors can greatly change earnings. For example, a one-time event, such as a real estate sale, can completely alter figures, producing earnings that are simply not accurate and fail to represent the actual earning potential of the company.
When it comes to your deal being completed, having a signed Letter of Intent is great. While everything may seem as though it is moving along just fine, it is vital to remember that the deal isn’t done until many boxes have been checked.
The due diligence process should never be overlooked. It is during due diligence that a buyer truly decides whether or not to move forward with a given deal. Depending on what is discovered, a buyer may want to renegotiate the price or even withdraw from the deal altogether.
The Forbes M+A Group was proud to be a Platinum Sponsor for Colorado Companies to Watch 2017. As entrepreneurs ourselves, we understand the perseverance and creativity it takes to create and sustain a thriving, successful business. We sincerely congratulate all of this year’s winners. Read the full press release.
Mergers and Acquisitions (M&A) Failure Rates Between 70% and 90% (Harvard Business Journal).
How to avoid failed transactions was the topic of a recent panel presentation co-sponsored by The Forbes M+A Group; Anton Collins Mitchell, LLP; Brownstein Hyatt Farber and US Trust During the invite-only presentation, three top business panelists shared their first-hand experiences on the complexities of divestitures and advice on how to avoid common M&A pitfalls.
Moderator Bill Nack, a Managing Director for The Forbes M+A Group, began the discussion by asking panelists to provide an overview of their recent transactions and what made them successful.
Kevin Durban, former owner of Performance Mobility, acquired his company in 2006 as a single store operation. Under his leadership, Performance Mobility expanded to 9 stores in four states, strengthened the management team, and implemented a phantom stock program for employees. In 2016, he was ready to take some chips off the table and the economy made the timing favorable. In 2017, Performance Mobility was successfully acquired by United Access of St. Louis, Missouri. Kevin shared that maintaining clean records and financials was key in the success of his sale. “Many owners treat their companies as personal checking accounts. We were always deliberate about keeping these separate.”
Companies grow in one of two ways: organically and through acquisition. Organic growth is achieved through the normal course of operations. New customers are added from sales and marketing and expansion to new territories. New products and/or services are added through R&D, product extension and updates. Most companies are continually pursuing organic growth.
The alternative is growth by acquisition. At a time when organic growth may be slowed due to lack of discretionary spending, limited access to working capital and general uncertainty in the market, acquisition(s) might be worth consideration for many companies.
What are some of the reasons companies make acquisitions?
• Add customers: For some companies, the sales cycle to add new customers can be extremely long and expensive. I have worked with companies that have viewed growing customers by acquiring another business to be less expensive and more reliable than the normal sales and marketing approach.
You may hear the word “goodwill” thrown around a lot, but what does it really mean? When it comes to selling a company, the term refers to all the effort that the seller put into a business over the year. Defining goodwill can be thought of as the difference between the various tangible assets that a business has and the overall purchase price.
Investopedia defines goodwill in the following way, “Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company’s balance sheet.”
Goodwill vs. Going-Concern
Now, it is important not to confuse goodwill value with “going-concern value,” as the two are definitely not the same. Going-concern value is typically defined by experts, as the fact that the business will continue to operate in a manner that is consistent with its intended purpose as opposed to failing or being liquidated. For most business owners, goodwill is seen as good service, products and reputation, all of which, of course, matters greatly.
Below is a list of some of the items that can be listed under the term “goodwill.” As you will notice, the list is surprisingly diverse.
One of the most significant reasons why Tom Chi was able to invent Google Glass, self-driving cars, Project Loon, and hundreds of game-changing inventions so fast is this…Tom learns fast and tries often, making small variations until he succeeds.