This month we’re starting to delve into our series, “What Is My Manufacturing Business Worth.” Before we get to all the “secret formulas” that everyone wants to know, we have to lay some groundwork. Boring? Maybe…but by the time I’m done you’ll know if that smooth talking mergers and acquisitions specialist asking you to write an upfront check for $25,000 to market your business is full of hot air. And, you’ll know the broker that is asking you to sign a year long listing agreement for your company at 10 times EBITA is simply a B.S. artist. You can’t combat the crap without the right ammunition. This straight talking Jersey Girl will cut through all the fluff, (that’s short for bullshit), and make sure that you know how to look at the numbers. Amen – let’s get to it!
Throughout this series we will reference many accounting phrases, which are consistently used in the industry. If you plan on selling your business it’s imperative that you know what these are. Is a sale price of 1-1/2 times “seller’s discretionary earnings” a good thing? How would you know if you don’t know what SDE refers to? I realize that this is elementary for some who perhaps have purchased or merged with other manufacturing companies. For many, selling their existing business will be the first and last time they ever deal with these phrases. Since our goal is to educate, we will not assume that our readership has been exposed to any industry phrases. I may add to this list in the coming months but here is….
The Manufacturing Business Brokerage Terminology Cheat Sheet:
Adjusted Book Value
The Book Value (equity) of a company after adjusting the value of assets and liabilities to reflect estimated market values rather than depreciated tax values and removing non-operating assets and liabilities from the balance sheet.
The earnings of a business after adjustments for one-time or extraordinary expenses, excess owner compensation, discretionary expenses and any other expenses that are not essential for the successful ongoing operation of the business.
A way of estimating the value of a business ownership interest using one or more Valuation Methods based on the Adjusted Book Value of the company.
A form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser. The corporate entity is not transferred.
The company’s current fiscal year. Since complete financial statements are not available for the current year, sales and income are projected based on the expectations of management.
The value, net of depreciation, at which an asset appears on a company’s balance sheet.
Any multiple or divisor used to convert a single period (usually a year) of anticipated economic benefits into a present economic value. It’s basically a rough measure of the company’s value. Capitalization equals the sum of the company’s long-term debt plus the value of its stock, plus retained earnings.
Capitalizing Net Income:
Determining the value of a company by dividing one year of Adjusted Earnings by the Capitalization Rate (investor’s required return on investment).
(also called Seller’s Discretionary Earnings or SDE). Total financial benefit to an owner working in the business enterprise. With the Cash Flow, an owner must pay himself a salary, pay his company’s income taxes, pay for any capital improvements (if needed) and set aside funds for unexpected events. SDE is calculated by adding the following expenses back into the net income:
- Owner’s Compensation
- Owner’s Fringe Benefits
- One-Time Expenses
The combination of types of payment by which the purchase of a business is accomplished. It can include cash, promissory notes, stock, consulting agreements, earn out provisions, royalties and covenants not to compete. The sale can take the form of an Asset Sale or a Stock Sale.
Discounted Cash Flow:
A projection of what the company will make in the future and an analysis of what that future cash flow is worth in today’s dollars.
The portion of the purchase price that is contingent on the future performance of the business. It is payable to the seller after certain predefined levels of sales or income are achieved in the year(s) after acquisition.
The company’s earnings before you deduct interest, taxes, depreciation and amortization. This allows buyer’s to compare apples to apples when considering the purchase of different companies. Why? Taxable income can be reduced by interest payments on equipment or loans. Looking at this number is a more accurate way to look at a company’s income. A company that has debt will have lower taxable income than one that doesn’t. This term will be used repeatedly throughout our series.
Fair Market Value:
The estimated price at which an asset or service would pass from a willing seller to a willing buyer, assuming that both buyer and seller are acting rationally, at arms length, in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. It is also presumed that the price is not affected by special or creative financing or sales concessions granted by anyone associated with the sale.
Fixed Interest Rate:
An interest rate that does not fluctuate over the term of the loan.
Going Concern Value:
The gross value of a company as an operating business. This value may exceed or be at a discount from the Liquidation Value. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plan and the necessary licenses, systems and procedures in place.
The amount by which the price paid for a company exceeds the company’s Adjusted Book Value of the underlying tangible assets and liabilities. Goodwill is a result of name, reputation, customer loyalty, location, products and net income.
General way of determining the value of a business, business ownership interest, security or intangible asset using one or more methods that calculate the present value of anticipated future income.
An analytical judgment of value based on the perceived characteristics inherent in the investment as distinguished from the current market price. Perceived being the primary word. This part of determining value is totally subjective.
The value to a particular investor based on individual investment requirements and expectations.
The estimated value, net of liabilities, of a company based on the market value of its assets. What would it bring at auction or if it had to be sold quickly.
General way of determining a value of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold.
Material Adverse Change (MAC):
Buyers usually enter a contract to purchase based on the company’s current success. If your company experiences a MAC – the buyer may seek to cancel the contract.
Net Book Value:
The difference between total assets (net of depreciation, depletion and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder’s Equity).
The value today of a future payment, or stream of payments, discounted at some appropriate compound interest rate (Discount Rate).
Pro Forma Financial Statements:
Hypothetical financial statements. Financial statements as they would appear if some event, such as increased sales or production, had occurred or were to occur. Also used to make projections for future years.
Prospective financial statements that present an entity’s expected financial position, results of operation and changes in financial position, based upon one or more hypothetical assumptions.
Financial recasting eliminates, from the historical financial presentation, items such as excessive and discretionary expenses and nonrecurring revenues and expenses, since they reflect the financing decisions of the current owner and may not represent financing preferences of a new owner. Recasting provides an economic view of the company and allows meaningful comparisons with other investment opportunities.
The estimated market value of an asset at the end of the period being considered.
Return on Investment (ROI):
The rate of return at which the sum of the discounted future earnings plus the discounted future Residual Value equals the initial cash outlay.
A form of acquisition whereby all or a portion of the stock in a corporation is sold to the purchaser.
Total of all consideration passed at any time between the buyer and seller for an ownership interest in a business enterprise and may include but is not limited to all remuneration for tangible and intangible assets such as: furniture, equipment, supplies, inventory, Working Capital, non-competition agreements, customer lists, employment and/or consulting agreements, franchise fees, assumed liabilities, stock options or redemptions, real estate, leases, royalties, Earn outs and future considerations.
A general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more Valuation Methods. There are three overall approaches generally used to value a business: Asset Approach, Income Approach and Market Approach.
Under a chosen Valuation Approach, there are various specific methods to determine value. We will break this out in detail in future installments of this series.
Variable Interest Rate:
An interest rate that adjusts periodically to a predefined margin above or below an index rate. A commonly used index is the bank prime rate.
The excess of current assets over current liabilities.
So there you have it – the cheat sheet you’ll have to refer back to in the coming months. As we go through this series you will see all of these terms in real live examples of brokerage deals. We encourage you to write in with any questions. We promise not to use your name….and there is no such thing as a stupid question. I firmly believe that this series will help small and medium size manufacturing companies be better prepared when it’s time to sell their businesses. We sell millions each year in ongoing businesses, manufacturing equipment, customer lists and product lines. During this series we’ll answer your questions FOR FREE. Don’t be bashful – bring it on! If I get to kick the ass of a few “mergers and acquisitions specialists” – this Jersey girl will be smiling! Consider this the Manufacturing Business Brokerage No Spin Zone. Until next month…thanks for reading!
Fran Brunelle is an industrial auctioneer with almost 20 years experience, a manufacturing business broker, licensed real estate broker specializing in industrial properties, a real estate auctioneer, certified appraiser and author. Fran has established several corporations that provide services to the manufacturing industry. The “Accelerated Group of Companies” provides tools and services to help manufacturers grow and exit strategies to maximize dollars when they are ready to retire or sell their manufacturing business. The group of companies that Fran Brunelle has established includes:
www.AcceleratedBuySell.com – Provides Online Industrial Auction Services, Used Equipment Auctions, Capital Equipment Auctions, Plant Liquidations, Industrial Plant Cleanout Services, Used Machinery Location Services, Certified Machine Tool and Equipment Appraisals, and more.
www.AcceleratedMfgBrokers.com – Specializes in Manufacturing Business Brokerage and Mergers and Acquisitions. We help manufacturers develop exit strategies to maximize retirement dollars, and successful manufacturers expand through acquisition of other manufacturing companies, product lines and customer lists. Manufacturing Companies for sale throughout the United States are listed on this site.
www.AcceleratedRE.com – Provides Industrial Real Estate Brokerage Services, Online Real Estate Auctions, Sealed Bid Real Estate Auctions and complete industrial facility cleanout services.
www.IgniteMfg.com – Provides funding for products made in the USA, and engineering/manufacturing educational needs through Crowd Funding.
www.MfgWebSolutions.com – Provides web development and social media services for manufacturers at under-market rates.
Fran Brunelle is a contributing author to:
blog.AcceleratedBuySell.com - A site that provides the latest manufacturing news, statistics and opinion. It also provides information on how to grow a manufacturing business, and what to do if you are a manufacturing company that needs to close.
MFGWebSolutions.com/blog - Provides the latest information on social media and web development for manufacturers. It gives manufacturers tips and tricks for boosting their web presence.