How to unlock the sale of your company?

In the previous article I showed a technique to increase a company's cash flow , consequently its perceived value. There are many other ways that we can use to improve a company's price and I intend to explore this subject to the fullest in a series of articles, which will be described here on our website. If you are considering a possible sale of your company, follow me in this article and I will show you a strategy that can make the sale viable and at the same time guarantee you passive income for a long time.

Status quo

You have a well-established mid-sized business that has been in business for a long time, making you an ideal target for investment funds and multinational companies looking for inorganic growth. You are in the middle of negotiating your company with a group larger than yours, however, the negotiations are not progressing because the deal per hour is not good for either party. But before you bang your fists on the table and give up on the deal, I'm going to propose a solution that will make the business viable.

Cash is still king.

In the company valuation methodologies we currently employ, we apply the principle “a company is worth what it generates ”. Therefore, the more a company generates in terms of profit and free cash flow , the more valuable it becomes. As the business is stuck and you intend to make the business viable, we will divide the company into two assets, one that will remain for you and the other that will be the object of negotiation, unlocking this possible business that you have been dreaming about.

A brief explanation of assessment methodologies

The appraisers sitting in front of you will most likely use one of two valuation methods to arrive at a fair price for your business: a Discounted Cash Flow valuation, or a Multiples Valuation . In both cases, cash generation is the primary metric for the evaluation model used, consequently our fine-tuning in finances will work like magic.

For reasons of simplicity in this article, I will use, in our valuation model, the profit multiple valuation methodology, considering a multiple in the region of 10 (PE=10). The rationale for this multiple is that the buyer is paying R$10 for every R$1 of your company's profit, therefore, the buyer expects to have a return on his investment ( Payback ) in 10 years, if everything remains constant.

If you want to adapt the multiple to your reality, I leave the link to Professor Aswath Damodarn 's database.

With this brief explanation, we are able to answer the question:

How to make the sale of your business viable?

We just need to separate some assets , such as fixed assets and/or patents, from the other assets that will be sold. If we do this efficiently, we will reduce the sales value of your company and at the same time ensure a good income for posterity.

Our case study

For reasons of study simplicity, we will imagine that the divisible assets are real estate, but we could consider any other assets that make up the company's assets. Let's imagine that your company is medium-sized with a turnover of R$4.2 million per month with a net margin of 12%. We also assume that your company has its own paid-for properties valued at around R$850,000. With this we have:

As we can see, the fair value of the company is R$5.04 million and this includes the entire set of assets necessary for the generation and operation of its normal activities, including the properties that are obviously used by the company.

Proposal modification

Let's now analyze the same company with a single change: causing the properties to be removed from the company's assets , and as the company now does not have its own properties, it must pay rent for the properties used.

In the model above, I assumed that the company pays 8% per year, on the value of the property, as rental expenses. Rent expenses are considered an operating expense, and their value is deducted from profit, according to each company's income tax rate. In our example we have a company in Real Profit with a tax rate of 22.5% . With the reduced net profit, we have a new fair price for the company of R$4.513 million, which makes the negotiation much more attractive for our potential buyer. When compared to the original R$5.04 million, it would be a 10.5% drop in the amount received.

However, as the former partners keep the properties, they (1) retain part of the R$850,000 equity, (2) guarantee income from property rentals of R$68,000/year and (3) make the sale possible by pocketing R$4,513 millions. In short, the former owners end up with even greater equity than the original offer and guarantee an income for retirement.

 

To make the sale of a company viable, we need to understand the real needs of our buyer, as investment funds are often much more interested in intangible assets while you, the current owner, may be more connected with tangible assets. Whether it's real estate, patents or licenses, try to understand what's most important to you and what's most important to your buyer, and break those assets down into parts if negotiations reach a tipping point.

I will leave the link so that you have access to this table and can adjust it according to your reality. Always consult your accountant to determine your company's taxation regime and income tax rate.