Tag Archives | Sales

Business Valuation Purposes

See Also:
EBITDA Valuation
Valuation Methods
Multiple of Earnings

Business Valuation Definition

Business valuation is the process of determining the economic value of a business or company. It assesses a variety of factors to determine the fair market value in a sale, but there is no one way to verify the worth of a company. Business valuation can depend on the values of the assessor, tangible and intangible assets, and varying economic conditions. Business valuation provides an expected price of sale; however, the real price of sale can very.

Traditional approaches to business valuation employ financial statements, cash flow models, and comparisons to competitive companies within a similar field or industry.

Business Valuation Methods

Income Approach: determines business value based on income. This type of valuation focuses on net cash flow, discretionary cash flow, and capitalization of earnings.

Asset Approach: determines business value based on assets. This type of valuation focuses on asset accumulation (assets minus liabilities) and capitalized excess earnings.

Market Approach: determines business value in relation to similar companies. This type of valuation focuses on the comparative transaction method and appraises competitive sales of comparable businesses to estimate economic performance looking at revenue or profits primarily.

(Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.)

Business Valuation Purposes

Although the primary purpose of business valuation is preparing a company for sale, there are many purposes. The following are a few examples:

Shareholder Disputes: sometimes a breakup of the company is in the shareholder’s best interests. This could also include transfers of shares from shareholders who are withdrawing.

Estate and Gift: a valuation would need to be done prior to estate planning or a gifting of interests or after the death of an owner. This is also required by the IRS for Charitable donations.

Divorce: when a divorce occurs, a division of assets and business interests is needed.

Mergers, Acquisitions, and Sales: valuation is necessary to negotiate a merger, acquisition, or sale, so the interested parties can obtain the best fair market price.

Buy-Sell Agreements: this typically involves a transfer of equity between partners or shareholders.

Financing: a business appraisal is required before obtaining a loan, so the banks can validate their investment.

Purchase price allocation: this involves reporting the company’s assets and liabilities to identify tangible and intangible assets.
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Why Do Most Financial Projections Fail?

Do you know the number one reason most financial projections fail? It is because sales are over estimated!

This time of year we are busy working with clients preparing projections for the next year. What we find is it is very difficult for clients to do an accurate financial statement projection if they can’t project sales. Working with companies to project the top line of the financial projections is the hardest part. Once you have the top line the rest of the projections fall into place based on historical numbers.

So how do you project sales? We generally start off with last year’s sales numbers. We ask ourselves do we think they are going to increase or decrease? If so, then by how much? We determine by product line how much sales we need to be profitable. We look at recent sales trends and review them with the sales team. Finally, we prepare a backlog schedule with identified sales on a monthly basis. The greater the backlog identified, the greater the accuracy!

When projecting sales it is important to be reasonable. You should strive to “under promise and over deliver”. Often the management teams strives to set the bar high for goal setting purposes. You don’t want to shoot yourself in the foot with your banker if you miss you projections by a wide margin! It is better to come in a little above your projections rather than quite a ways below your number.

What has been your experience in projecting sales?

 

 

 

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Declining Sales: or How low is low?

If you are like most companies I am talking to these days your sales are off from there high for last year. Nobody is immune and there is no place to hide! You have had declining sales for the past six to 12 months with no end in site. So what sales volume should you anticipate going forward?

In speaking with several entrepreneurs over the past few weeks I have come to the unscientific conclusion that most companies severely impacted by the recession are experiencing sales declines of 25% to 33% from there highs for last year. Of course there are exceptions, but, for the most part, this percentage hold true.

As to why this is taking place I have my theories. Though there obviously is a recession going on, more importantly, there is a complete lack of confidence in the future. Most companies are still making money though all are hoarding cash.

So if you anticipate sales dropping 25% what do you do? We are recommending our clients prepare a “worst case” scenario using a break even template. You should identify what cuts will be required to survive a sales drop of this magnitude. If and when a sales drop occurs you will then be in a position to take action quickly.

Just tell me where the bottom is and I can make money!

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A Whole Lot of Kissing Going On!

If you were like me for the most part you took off the last two weeks of the year and coasted at work. Most people didn’t want to start new projects or make sales calls. It seems with 2 1/2 work weeks and the emotional stress of the last quarter everyone need a break. I know I did!

But this first week back it seems everyone is coming out of the woodwork! We are getting tons of emails and phone calls. Everyone wants to meet and follow up on introductions. I can’t seem to get to them all and still get my work done. I have been going from meeting to meeting and talking on the phone half the day.

Yesterday I finally sat back and asked “what’s going on?” I thought about who was calling and what was the short term results? I came to the conclusion that there is a whole lot of kissing going on, but, not a lot of sex!

What I mean is that most of the people wanting to meet were other service providers who wanted to network but didn’t have much business going on. There wasn’t any actual sales leads coming in. It appears that everyone is hitting the ground running trying to work twice as hard to generate the same amount of sales. Not a bad idea!

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Should You Cut Marketing Expense in a Recession?

Most CFO’s cut costs to obtain profitability for the company. In a recession that is often the best course of action. The question is: what kind of knife do you use? A meat cleaver or a scalpel?

Marketing costs are a prime target for the CFO’s slashing of expenses. The logic is: If fewer people are buying then why spend more marketing dollars to prospects who aren’t going to buy anyway? Makes sense!

But there is another way to look at marketing dollars. Even in the lowest point of a recession there are sales, albeit, at a lower level. Let’s assume that your company wants to hold sales flat good times or bad.

During the good times sales come relatively easy. There is plenty of demand and it doesn’t take much effort for the phone to ring. If you wanted to hold sales flat then you would reduce your marketing dollars in the good times. Right?

Conversely, when bad economic times are upon us it takes considerably more effort to generate the same sales volume. So if you increase your marketing efforts in a recession you should be able to hold your sales flat.

The problem with this argument is that most companies don’t have the free cash flow to fund increased expenses in a down market. So what is the solution?

I suggest that you take a scalpel versus a meat cleaver to your marketing expenses. Analyze the productivity of your marketing dollars. What marketing programs have produced the most results? Is it public relations? Direct mail? web site?

You should start tracking how your sales inquiries hear about you. We had one client who was spending $250,000 per year on yellow pages ads. We set up a program to track the source of each sale. The client discovered that less than 10% of their new sales cam from the ads. The majority of their new sales cam from the inside sales force. Consequently, we reduced the yellow page budget to $50,000 per year and hired two more inside salesmen.

So before you start slashing and burning your marketing budget go back to the tried and true marketing efforts that produce results.

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