Tag Archives: professional valuation

Don’t Be Afraid To Sell Your Business in an Increasing Rate Environment

There’s no question that the world of business sales hinges on the leveraging and financing of deals. Considering this, you’d think that the higher interest rates we’ve been experiencing would be a huge deterrent to buyers.

However, that’s not necessarily the case. 

If you’re considering selling your business but are concerned about rising interest rates, read on to learn why you don’t need to be worried about selling in this increasing rate environment.

Historically, Interest Rates Are Still Relatively Low

While an initial look at rising interest rates can be scary (to buyers and sellers alike), it’s important to remember that, historically, we’re still seeing relatively low interest rates.

Although interest rates are higher than they’ve been in many years, they’re still a far cry from the highs of the early 80s, when rates reached an all-time high of 20%! In fact, the extremely low interest rates we saw in recent years were more of an anomaly.

Plus, the old adage “what goes up, must come down” exists for a reason. Inflation has already begun to slow, and, eventually, interest rates will follow. So those buyers who are turned off by a rising rate environment won’t be out of the game for long.

For Individual Buyers, a Few Percentage Points Won’t Make a Huge Difference

For individual buyers who get their financing through SBA-type loans or seller financing, the relatively marginal increases we’ve seen won’t make a huge difference on their cash flow. 

The truth is, if a business can’t adequately service the debt because of the increased cost, it’s probably not in a buyer’s best interest to buy, regardless of interest rates. While this may cause some buyers to lower their offering price to account for the added interest rate burden, it’s unlikely they’ll be completely deterred from buying. 

Plus, there are lenders out there who aren’t tied to the prime lending rate. A buyer working with one of these lenders won’t be as concerned about interest rates.

Private Equity Groups Have To Invest Their Capital

Institutional buyers like private equity firms exist to invest their capital. They really don’t have a choice in the matter: If they don’t invest their money, they have to return it to their investors (with a handsome return)…and we all know they don’t want to do that!

PEGs typically have to return undeployed capital within a relatively short window of time (usually less than 10 years). That means they’re nearly always under pressure to acquire and grow businesses. 

In the face of rising interest rates, PEGs will adapt as they always do, and they’ll continue to buy businesses.

Cash Buyers Aren’t Concerned About Interest Rates

While cash buyers aren’t the norm, they’re definitely out there. 

And for buyers who aren’t dependent on financing, interest rates are a non issue. In a cash transaction, no interest is being paid to acquire the business anyway. So interest rates should have no effect on the acquisition.

When It’s Time To Sell, It’s Time To Sell

Regardless of what the market’s doing, sometimes there are family, health, or financial issues that dictate it’s time to sell your business. And in those cases, it’s always the right time to sell.

In any market, a certain degree of uncertainty is inevitable. You can never know the perfect time to sell stocks or your home…and the same is true of selling your business. The best way to navigate this uncertainty is to keep an eye on the big picture in the context of your industry and maintain a lean, efficient company.

An added bonus of an increasing rate environment for a seller is that you’ll benefit from that higher interest once you reinvest the proceeds of your sale.

OIB Can Help You Sell in an Increasing Rate Environment

Having an expert business broker by your side gives you yet another reason you don’t need to worry about selling your business in a rising rate environment. That’s where the team at OIB comes in.

At OIB, we’re experts in business valuation, deal negotiation, and navigation of a business sale—in any environment. We’re also adept at helping connect our clients with the right financing: For example, we’re continually meeting with lenders whose cost of lending is not tied to the Prime Lending Rate, making rising rates less of an issue.

If you’re thinking about a business sale this year, OIB would love to partner with you to get your business sold. Contact us today to discuss your needs and get started.

Business Valuation 101: What Is Your Business Worth?

As a business owner, there’s a high likelihood your business is your most important financial asset. Even so, if you’re like most business owners, chances are you don’t know what your business is worth.

The fair market value of your business won’t be found in your financial statements or tax returns. You won’t get the answer from your accountant or attorney. And the sale prices of similar business transactions can be hard to find, as sales agreements are usually kept private. 

You can find the fair market value of public businesses on the stock market, but that’s not the case for a private business. While public company valuations can provide some context, it’s hard to translate that data to a small, privately held business…even when you take into account the difference in size, stability, liquidity, and other factors.

So how do you determine the value of your business? This is where a business valuation comes into play.

What Is a Business Valuation?

In short, a business valuation is the process of determining the value of a business. During this process, all aspects of the business are evaluated in order to determine its overall worth.

However, it’s not as simple as it sounds. Business valuations are complex, subjective, and highly dependent on relatively abstract factors like location and anticipated earnings. They involve a fine-tooth assessment of cash flow, projected growth, and internal and external risk factors that help determine the fair market value of your business.

Ultimately, a business is like any commodity: it’s worth what a buyer will pay for it. 

If a buyer has a strategic reason to acquire a business, the sky could be the limit as far as value goes. If not, the value of your business may look very different. Having a professional evaluation of your business’ value is crucial to a successful sale.

At OIB, we help you determine a price that is both fair to you and attractive to a buyer, based on our extensive knowledge of the market.

We have a built-in advantage over most other appraisal firms: we’re engaged in the market of selling and buying businesses every day. We know what businesses sell for, because that’s what we do, day in and day out. Our valuation is more than an opinion: it’s supported by data from the sale of thousands of businesses, as well as from databases providing statistics from business sales across the country.

Why Would Your Business Need a Professional Valuation?

While the most obvious time to appraise a business is when it’s about to be sold, business appraisals are valuable in any number of situations, including:

  • Buy/sell agreements
  • Estate planning
  • Stockholder disputes
  • Tax disputes
  • Business expansions
  • Changes in partnership
  • Divorce settlements or other personal life changes

…and many more. But you don’t have to wait for one of these events to happen to have your business evaluated. Just as you should always keep your business plan up to date, it’s ideal to always have an updated valuation of your business so you’re prepared in case an event arises where you need it.

How Are Business Valuations Calculated?

There are four main types of valuation most business appraisers use: Liquidation or Other Assets-Based methods, Investment Value/Capitalized Earnings, Excess Earnings, and Discounted Cash Flow/Future Earnings.

  • The Liquidation or Other Assets-Based analysis estimates the resale value of hard assets, then subtracts business debts to reach an asset-based value. This method assumes the business will cease to exist and all assets will be sold to pay off liabilities. Liquidation is best used for businesses that aren’t making money and whose tangible assets are worth more than the value of the business (based on earnings).
  • With the Investment Value or Capitalized Earnings method, you would first determine earnings over the next 12 months, then determine the desired rate of return, based on risk. Risk is calculated based on a comparison of alternatives (bank, securities, etc) and the rate of capitalization. This method is useful for businesses that aren’t making money and whose value based on earnings exceeds the value of their tangible assets.
  • Using the Excess Earnings method, you would first determine the value of tangible assets, the cost of owning the business, and the value of earnings. You would then subtract the cost from the earnings to determine excess earnings. From there, you’d apply the rate of capitalization to the excess earnings. Finally, you would add the capitalized excess earnings to the tangible assets to determine the value of the business.
  • The Discounted Cash Flow (DCF) or Future Earnings method attempts to estimate future cash flows, and uses that to determine a business’ current value. However, this method is rarely used in the sale of a small business.

Ultimately, the most reliable indicator of your business’ value is what a buyer will pay for it. Buyers decide what they’re willing to pay for a business based on how much they think the company will make them. 

This means you need to be prepared to represent your business with well-presented documentation, an investment thesis, and knowledge surrounding how to counter price-chipping (a common strategy buyers use to lower the sale price by identifying possible issues with your business).

At the end of the day, evaluating a business is a complex process. Even if you follow every guideline and piece of advice you can find, there are assets or issues you’re going to miss. 

That’s why the best course of action is to call in a professional like Opportunities in Business. With our experience, specialized knowledge, and tools, we can give you the most accurate estimate of your business’s worth. Plus, as business brokers, we can help you find the buyers you need and guide you through a successful sale.

Contact the team at OIB today to get started on your business valuation.