connectcode .net barcode sdk An Appraiser s Perspective on Valuation for Sale in Software

Generating Quick Response Code in Software An Appraiser s Perspective on Valuation for Sale

CHAPTER 10 An Appraiser s Perspective on Valuation for Sale
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Appraisers usually have superior mathematical skills which is not surprising, since it s what they do full-time while brokers have a superior knowledge of the market Also, an appraiser normally will not find a buyer for you Thus, if you want someone to sell your business, you ll need a business broker If you can afford both, it is best to have both skills working in your favor, each one keeping the other honest and supporting and sometimes challenging the other Business brokers normally will do the valuation for you for free, or it should be included in their representation fees Usually, you ll save appraisal fees if you use only a broker The broker earns his or her living by earning a commission on the sale Their customary fee is 10 percent of the selling price for the first $1 million, and a lower percentage thereafter Appraisals can cost a few thousand dollars for small businesses, to several million dollars for giant mergers Most valuations of small- and medium-size businesses cost from $5000 to $25,000 in 2004, but there can be much variation, depending on the complexity of your business, the reason you need a valuation, your risk of a poor result arising from not paying for enough work, the appraiser and firm doing the work, and a host of other factors Appraisal fees also partly or largely depend on the skill level of the business valuator you hire, and the size of the firm for whom he or she works There is a wide range of skill levels in business valuation, from the uneducated and untrained, who do shoddy work; through CPAs, who do valuation part-time; to fulltime valuation professionals about half of whom are CPAs who specialize in valuation, and half are usually MBAs; and, finally, to a small number of world-class leaders in the profession Generally, you get what you pay for Usually the higher the skill level and the bigger the firm, the more expensive it is, with firm size probably the more important factor when it comes to cost There are inexpensive automated valuation services that produce appraisals Those that I have seen rely on shortcuts, analyze only one year of data, and would not even qualify as an appraisal under the Uniform Standards of Professional Appraisal Practice I do not recommend cookie cutter valuation, despite their claims of using sophisticated methods
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PART TWO The Sale and Financing of a Business
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THE DANGER OF IGNORANCE, SELFDECEPTION, AND GREED
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While there are some sellers who get lucky and sell high and I certainly have seen that the majority of sellers need to be realistic Seller ignorance, self-deception, and greed lead to disaster more often than they lead to a windfall Of course, everyone wants to sell high, but the question is: What value have you created that others will pay for If you ve created a turnkey business that is profitable, has demonstrated strong growth, has a strong management team, and can function well with someone else filling your shoes, then you have created value, and maybe you might sell for a PE multiple7 in the 6 to 12 range8 Michael Keane, investment banker and author of 12, told me that his clients typically sell in the range of four to six times EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) EBITDA is equal to net income before taxes plus interest expense, depreciation, and amortization For most midsize businesses, EBITDA is much higher than net income after taxes, which is the basis for the PE multiple EBITDA easily could be twice net income after taxes, which means if the Price-to-EBITDA multiple is 4 to 6, that easily could translate into a PE multiple of 8 to 12 In fact, the latter range should be somewhat wider, because the components of EBITDA net income before taxes, interest expense, tax rates, depreciation, and amortization can vary widely across firms Additionally, Keane stated that the EBITDA multiple might be higher in an up market for a large firm with excellent historical and expected growth For reference, his smallest clients have $10 million in Fair Market Value, and his absolute, all-time smallest client was at $5 million FMV Thus, his clients are not in the same size range as the clients of business brokers While publicly traded firms often sell for PE multiples of 15 to 30, these are usually companies that are much larger, bet7 8
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Price Earnings multiple For review, see 2 and its appendix I have had one client with net income over $1 million sell to a Fortune 500 strategic buyer for a PE multiple of approximately 28, so the dream deals do happen on rare occasions Even so, this was a large client with an exciting product and a very strong management team that stayed on long-term with the company, including the CEO
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