We are in that part of the business cycle when business owners start to think about the value of their business and whether they should "pull the trigger" this time around rather than talk about it.

When owners start thinking about value they normally go through a process that leads them to some kind of formula, whether they work for this industry or not. It's easy to talk to bankers and accountants and even valuation experts and come up with a "formula" to apply to the business. Getting the formula is easy. Calculating the value using the formula is easy. Figuring out if it makes sense seems to get left behind, which results in sellers believing they are not getting full value and buyers thinking the deal is overpriced.

Nobody wants to get involved in this buy/sell situation and waste time and dollars. Sellers want to sleep at night knowing they have a reasonable deal on the table, and buyers want to sleep at night knowing they are pursuing a reasonable deal which they can make work going forward.

How do we assure everyone of a good night's sleep? We finish the homework required to assure all parties that a deal is "reasonable."

Dealerships with rental activities are a breed unto themselves when it comes to valuation. If the accounting and finance people do not realize this, there is a good chance the "deal" will be a waste of time. By waste of time, I mean the pricing as established will not be fundable by the cash flow of the selling organization. This realization usually comes up during the due diligence process after major commitments from both sides of time and money.

The due diligence usually reveals the cash flow does not support the debt service and ROI required making the deal doable. In short, this means the pricing does not work. And when a potential buyer comes back to the seller and explains the results of the due diligence, the seller gets defensive and somehow the deal never gets done. If the seller, however, would have completed their homework, the results may have come out differently.

The aforementioned homework consists of establishing pricing based on an analysis of how a typical buyer would finance the purchase with the related debt service and equity requirements. There may be variations to this theme, but once the post closing projections are done the first time, the remaining scenarios are easy to perform. This means projecting the post closing income statements, balance sheets and cash flows to determine that the funding assumptions are reasonable. If they are not, pricing needs to be re-evaluated.

Following this process means you can use any method you want to express a value, but determining that it works is the key to getting the transaction closed. This analysis provides the seller with a range of values to consider depending on who the buyer may be. It also provides a seller with a comfort level that they are receiving a reasonable price for the business. No more staying up nights wondering if you left millions on the table.

Using this process the seller has put him/herself into the shoes of the buyer and has analyzed the projected cash flows and convinced him/herself that it works. Doing this serves two purposes; it sets a range of values and provides the benefit of knowing when a buyer is low-balling the offer. In short, it puts the seller in control of the process. A nice place to be.

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