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Value Factors: A Look at Your Company Through the Eyes of a Buyer

Sophisticated business buyers consider a number of factors in their evaluation of a company. Based on our experience selling companies, Warren Averett has identified 54 important factors that buyers consider in determining the value of a particular company. The factors are divided into Personal, Business Operations, Industry, Legal/Regulatory, Financial, and Economic/M&A Market.

Chapter 1:

Personal Factors

personal factors

1. Age/Motivation of Owner(s)

How old is the owner? Does the owner have a specific plan in place regarding what he or she will do after exiting the business? Buyers will be concerned that a lack of a plan may indicate that the owner is not committed to exiting and that the owner may change his/her mind just before closing.

2. Attitude of Owner

Does the owner demonstrate a positive and cooperative attitude? Is the owner enthusiastic and committed to the business’ future? Is the owner in no hurry to sell? Does the owner answer all questions honestly and openly?

3. Family/Partner Consensus

Are the owner’s spouse, family members and/or other shareholders in full agreement about the exit plan? Do any family members or other shareholders have any hidden agendas?

4. Reasonable Expectations of Value

Are the owner’s expectations in line with recent sales of comparable businesses? Has the owner received a business evaluation from an independent third party and does the owner consider the enterprise value to be acceptable?

5. Open to Deal Structure

Is the owner insisting on an all cash transaction or will he or she consider various forms of deal structure including seller notes, non-compete payments, consulting agreements and/or earn outs? Is the owner willing to provide a buyer with the normal indemnifications and warranties that are typical in similar transactions?

Chapter 2:

Business Operations Factors

Business Operations

6. Products/Services

If the Company is a manufacturer, does the Company manufacture a proprietary product, or is it a job shop? If the Company is a distributor, does it provide value-added services? If the Company is a service-provider, does it offer a differentiated service?

7. Management Team

Does the Company have a strong and experienced management team in place that has demonstrated a track record of success, or is the Company largely dependent on the owner for its success?

8. Sales Team

Does the Company have a strong sales team with a record of new account growth? If the Company utilizes sales reps, is the Company’s business a significant and profitable part of the reps’ business.

9. Sales and Marketing Literature

Are the Company’s sales and marketing materials up-to-date, attractive and informative?

10. Customer Base

Do any of the Company’s customers account for more than 10% of revenues? Does the Company have a long history with its major customers? Are new customers being added on a continuing basis? Are the Company’s customers consumers, retailers, or large corporations?

11. Customer Relationships

Does the Company have positive and long-standing relationships with its customers or do customers turnover quickly? Are the relationships with the Company or are they dependent upon the owner(s) remaining with the Company?

12. Vendor Concentration

Is the Company dependent on any single vendor or group of vendors? Are the Company’s raw materials and other inputs readily available from multiple sources at competitive prices?

13. Product/Service Quality

Are the Company’s products or service high quality compared to competitive products/services? Has the Company received a quality certification such as ISO 9000?

14. Employees

Does the Company have an ample source of qualified and competitively priced labor? Are employees well trained and motivated? Are salaries and hourly pay in line with comparable jobs in the geographic area?

15. Employee Benefits

How does the Company’s benefit program compare to that offered by other industry players?

16. Union

Is the Company’s labor force unionized? If the Company is organized, is there a history of good relations with the union and no strikes? If organized, is the Company’s union contract set to expire within the next two years? Is the Company a party to a multi-employer pension plan

17. Employee Relations

Does the Company have dedicated employees with positive attitudes and low employee turnover?

18. Facilities

Are the Company’s land and buildings clean, well maintained and in compliance with all building codes and regulations? Do the Company’s facilities demonstrate an efficient layout? Is there room for expansion within the existing facilities? If owned, is the seller open to either selling or leasing the facility to the buyer? Is a recent appraisal available? If the Company’s facilities are leased, is the remaining term of the lease five years or less (including renewal options)?

19. Computer Systems

Are the Company’s computer and data processing systems up-to-date and fully integrated? Is the system’s capacity sufficient to meet the Company’s needs over the next several years or will it require an upgrade or replacement in the near term? Does the Company use standard software packages or does it operate proprietary software that was developed in-house?

20. Company Website

Does the Company maintain and operate a website? If so, is the website attractive, easy to navigate and up-to-date and is it part of a fully developed Internet strategy?

21. Fixed Assets

Are the Company’s fixed assets up-to-date and well maintained? Are fairly recent equipment appraisals available?

22. Leases & Other Significant Contracts

Are the Company’s leases and other contracts assignable or would they place restrictions on new owners? Is the rent the Company pays on its building comparable to local market rates?

23. Location

Is the Company location convenient to vendors and customers? Are competitive transportation services available? How does the cost of living in the local area compare to other areas? Is skilled labor readily available?

Chapter 3:

Industry/Market Factors

industry factors

24. Consolidation Stage

Is the company’s industry undergoing consolidation in which smaller competitors are purchased and consolidated into larger companies to achieve benefits of scale and the elimination of duplicative costs? Depending on the stage, this factor could be positive or negative.

25. Industry Outlook

Is the company’s future favorable in terms of future growth projections, profit margins, competition, legislation etc.?

26. Opportunities for Growth

Have significant and feasible opportunities for growth been identified? Are plans in place and have preliminary actions been taken to implement them?

27. Availability of Industry Data

Is information on the industry readily available from industry associations or business press including growth projections, industry trends, competitors etc?

28. Barriers to Entry

Do significant barriers to entry exist for new competitors including barriers such as high-invested capital, patents, brand names, reputation, significant expertise etc.?

29. Market Position

Does the company have a strong market share or a protected niche in the industry? Does the company have a well-known brand name and excellent reputation?

30. Product/Service Obsolescence

Does the company have a favorable long-term outlook for its products or services that is not threatened by technological obsolescence or global competition?

Chapter 5:

Financial Factors

financial factors

39. Track Record

Does the company have a consistent record of growth in both sales and profits over the last several years? Have sales growth and profit margins been equal to or better than overall industry?

40. Business Plan

Does the company have a documented business plan for the next three to five years is in place? Is the plan comprehensive, believable and does it include specific and measurable objectives? Does it include all the necessary action steps along with costs and investments to implement the plan?

41. Cyclicality

Are the company’s revenues affected by the economic cycle?

42. Seasonality

Do monthly sales, expenses and working capital requirements vary significantly throughout the year?

43. Revenue Size

Are the company’s revenues in the upper half of all competitors in the industry? If not, is the company of sufficient size that it could serve as a “platform” for consolidating a number of companies in the industry?

44. Operating Margins

Are the company’s operating margins equal to or better than industry norms? Have margins been stable or improving over last several years?

45. Overhead

Are the company’s overhead costs consistent with industry norms? What increases in overhead costs are required to support future growth?

46. Assets less Liabilities (Equity)

Does the company have a substantial base of leveragable assets with a relatively low level of liabilities? What is the company’s debt load?

47. Receivables

Does the company have average receivable days that are consistent or better than the industry norm? Has the company had any serious bad debt write offs?

48. Inventory

Is the company’s inventory turnover consistent or better than industry norms? Does the company have little or no obsolete stock? Has the company’s written off inventory been physically discarded?

49. Current Liabilities

Are the company’s accounts payable current and consistent with industry norms? Are the company’s other current liabilities consistent with industry norms?

50. Annual Capital

Are the company’s annual capital expenditure requirements relatively low? Does the company anticipate any major capital expenditures in order to support future growth?

51. Financial Statements

Does the company have audited financial statements?

52. Company Records

Are the company’s records in good order and easily accessible?

Chapter 6:

Economic/M&A Market Factors

economic factors

53. Economy

Is the general economy expanding and are indicators such as interest rates and the stock market positive?

54. M&A Marketplace

Is the M&A market positive including ready availability of financing, low interest rates and favorable tax laws? Are both financial and strategic buyers actively acquiring companies?

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