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In our Merger and Acquisition practice we watch as business buyers go through an exhaustive analysis to determine if it is financially prudent to make a particular company acquisition. Some use EBITDA multiples or free cash flow multiples. Others use the classic discounted cash flow approach while another group might look at a payback period analysis or debt coverage ratios. They all have one thing in common, however. They do a financial analysis as the primary determinant in making a decision to buy or not to buy.
It occurred to me that a business owner, not necessarily a business seller, should do his own financial analysis to determine if he is better off owning the business or selling it. In other words, will a business owner make more money by selling the business and replacing his business salary and dividends with the investment income he would earn by investing the business sale proceeds?
Owner A Owner B Owner C
Owner Comp $137,500 $578,490 $800,000
Sale Price($000) $4,400 $17,600 $26,000
Tax & Fees($000) ($1,100) ($4,400) ($6,500)
Net Proceeds($000) $3,300 $13,200 $19,500
Investment Income $214,500 $858,000 $1,267,500
Gain (Loss)*** $77,000 $279,510 $467,500
*Representative examples for Illustration purposes
**Proceeds invested @ 6.5%
***Calculated as Income from Investments less Income from Compensation
When you look at it using this analytical discipline, it puts things into a whole new perspective. Now let's add another factor to make the analysis even more interesting. When a business valuation firm performs a discounted cash flow analysis to value a business, they typically take the projected cash flows for ten years and discount those cash flows to today's value using a risk adjusted discount factor.
Dave Kauppi is a Merger and Acquisition Advisor with MidMarket Capital Advisors, LLC. MMCA is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries. The firm counsels clients in the areas of M&A and divestiture, family business succession planning, valuations, minority interest shareholder sales, business sales and business acquisition. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA (International Business Brokers Association) and the MBBI ( Midwest Business Brokers and Intermediaries). Contact Dave Kauppi at (630) 325-0123, email davekauppi@midmarkcap.com or visit our Web page www.midmarkcap.com.
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