How do I tell how much my business is worth?

Recently, the media website mediaShephard.com asked me to write an article about the frequently asked question, “How much is my business worth?” As a member of the  mediaShephard’s Panel of Experts, I offered the following thoughts on how to determine your  business’ valuation.  

This is a very complex question, which I get asked frequently. The value of a business is the present value of the future streams of cash flow. These sorts of projections, however, are very difficult to make with any level of accuracy and credibility.  Therefore, media investment bankers may discuss valuations in terms of multiples of EBITDA (or Earnings before Interest, Taxes, Depreciation and Amortization). This is a surrogate for the future cash flow, mentioned above. Currently multiples range from 5x to 10x of the most recent twelve months’ worth of EBITDA.

What separates a 5x company from a 10x company? Here are my thoughts:

• Profitability and growth in revenues and profits. Because the value of a company is based upon future cash streams, a company with growing cash streams is worth more than a company with flat or declining revenue and profits.
• Type of media property. All other things being equal a company with significant internet activities will be worth more than a traditional print media company or a newspaper. Again the future profitability is brighter (or at least seems that way) for an internet company.
• The industry served by the media company and the growth prospects for that industry. For example, a newspaper-centered business may be worth less than a publication serving pharmaceutical companies, all else being equal, because of the differing future prospects of the industries being served by the publishers.
• The industry position. Are the media properties leaders in their field or are they tertiary products? The number 1 in a field is worth more than the number 5 in the same field.  Leaders always command higher profits.
• The size of the business. Let’s say there are two media companies:  one a mature company with revenues of $2 million and the other with revenues of $20 million. It may be difficult for the smaller mature company to find any buyers. It may even be difficult for the seller to find an investment banker or broker who wants to handle such a small transaction.

The following are other important factors:

• The existence of a strategic buyer. A strategic buyer may be a competitor who believes that acquiring your company will add more value to their company, perhaps because of technology that the seller [or buyer] has, for example. Generally strategic buyers are willing to pay more than a non-strategic buyer.
• External factors such as the level of interest rates and the availability of capital/loans. If a buyer has to finance the purchase of an acquisition, the availability and cost of such financing will have an impact on how much they can afford to pay.
• The quality of your management team and whether you and other team members are willing to stay with the company after the acquisition.  Buyers often prefer to retain a management team, at least for a short period of time.  They may offer earn-out, stay bonuses or other incentives to do so, which should be taken into account when assessing the overall purchase price.

Owners interested in selling their company should speak to and develop relationships with the investment bankers/brokers who handle deals in their industry. Also make sure that they handle companies of your size. Again, the mature company with $2 million in revenue may not be of interest to one of the larger well known investment bankers / brokers. There are a number of independent investment bankers, however, who may be interested.

Finally there is the question of which investment banker to hire. Let’s say that you speak to 3 investment bankers who estimate a selling price of your company to be $10 million, $11 million and $20 million, respectively. You should be wary of the broker who suggests a price of $20 million. Since all brokers are paid based upon a percentage of the selling price, all of them have the incentive to sell your company for the highest price possible.  While the broker that suggested $20 million might seem appealing, are they going to be able to actually consummate such a transaction? The inflated asking price may actually turn off potential buyers. This may hinder being able to close a transaction. I have seen brokers who do this regularly and cannot close the transaction. Meanwhile you are counting on $20 million and this is not going to happen.

One way to get a realistic view of the true value of your company is to ask each banker/broker to explain the reasoning behind their valuations–are they comparing your company to the recent transactions of similar companies, are they using reasonable estimates for financial projections of your company’s growth, or are they just guessing at a big number in order to get your business?

And finally there are the accounting records. You should make sure to have proper accounting records and methods because any serious seller will insist on seeing them. I have seen deals that did not close because the seller’s accounting methodology was questionable. You should “scrub” your accounting records. Involve a CPA.

If you have any questions, we offer our readers a free one-hour consultation. Please call 516-605-0276 for an appointment

Manage Your 2014 Tax Bill by Knowing Medicare Surtaxes

We’re now in our second year of the new Medicare surtaxes. If these surtaxes affect you, we will help you develop a tax plan to take them into account and keep them to a minimum.

Take Steps to Deal with Medicare Surtaxes 

1. Earned income

• To help minimize the surtax on earned income, try to defer excess discretionary earnings (such as commissions or bonuses) to a lower-income year.
• If you are self-employed, consider maximizing payments of deductible expenses in high-income years while deferring late-year customer billings to the following year.
• Think about increasing your withholding or quarterly estimate payments to cover any additional liability.

2. Investment income

• The surtax on net investment income is trickier but provides more planning opportunities. To reduce this surtax:
  • Consider liquidating depreciating stocks to offset capital gains.
  • Shift some investments to tax-deferred annuities, municipal bonds, or other vehicles that don’t generate taxable income.
  • Maximize deductible contributions to traditional IRAs, 401(k) plans, or similar sheltered investments. Their earnings are excluded from NII, and the contributions reduce your MAGI.
  • Donate appreciated stocks to charities rather than selling them.
  • Try to make otherwise taxable investments through a Roth IRA. The earnings won’t be part of NII, and subsequent tax-free withdrawals won’t count toward the thresholds.

Marriage: Tax Penalty or Bonus

Summertime is the traditional season for weddings. If you’re planning a wedding this summer, you should take a look at how marriage could affect your tax bill.

Marriage: Tax Penalty or Bonus?

1. Tax Penalty.

• The so-called “marriage penalty,” is the term applied to the amount of additional taxes some couples pay after they marry.
  • If you and your spouse earn similar amounts of income, you may pay more tax as a married couple than each of you would as single individuals because your joint income pushes you into a higher tax bracket.
• Other provisions that can create a marriage penalty include phase-outs of personal exemptions and itemized deductions.
  • The new Medicare taxes can create a penalty because the threshold for applying them is $200,000 for singles and $250,000 for couples filing jointly.
  • If one spouse has a retirement plan at work and the other contributes to an IRA, you may not be able to deduct the full amount of your IRA contributions after you’re married.

2. Tax Benefit.

• The tax code can also create “marriage bonuses” which are situations when tax liability can decrease after you marry.
  • For example, if only one spouse has income, the wider brackets for marrieds at certain tax rates will give the couple a lower tax bill than paying as a single on the same amount of income.
• Other marriage bonuses: A wage-earning spouse can make an additional IRA contribution for a nonworking spouse, and married homeowners get double the $250,000 gain exclusion when they sell a home.
  • What to do: Analyze the benefits of potential current income tax savings against your future goals.
  • For example, plans for distributing corporate income or selling the business have tax consequences that will affect your decision.

Manage Your 2014 Tax Bill with Summertime Tax Planning

Midyear planning is critical to individuals, as well as businesses. There’s enough of the year behind you to establish a track record and enough time ahead to make changes that matter.

Summer: the season for sun, sandals, and tax planning. Kick back in your lounge chair and review the following suggestions for easing your 2014 federal income tax bill.