Best Practices, Finishing Touches, Operations, V6I5

Time to Sell (Your Business)?

(Photo courtesy of Aaron Murphy from FreeImages)

For business owners, a successful enterprise provides a reward in the form of current compensation, benefits, and/or distributions of profits. Owners, however, most often look to the future sale of their interest as a longer-term goal. 

Most shed builder businesses are small- to medium-sized, privately owned businesses.  Similar to other privately owned businesses, they lack an important vehicle when it comes time for an owner to sell: an active market where a value can be easily determined and then quickly converted into cash. 

Despite the limitation, the seller of a privately owned shed business can use general valuation concepts derived from active markets or comparable transactions to guide them in establishing a range of values for their own business.  

There is a vast amount of information available dealing with investment theory and valuation approaches.  A complete analysis of valuation theory is beyond the scope of this article.  While this article focuses on a few fundamentals, it is important to note that the approach to value a business that builds sheds may be very different than a company in the rent to own segment of the industry. 

As a background, a publicly-traded company is one with equity or debt traded on a public market.  These public companies are governed by strict regulations, requiring substantial public disclosures, audited financial statements, and in most instances taxed as corporations. 

These attributes are often different in private companies, unless a bank or investor requires certain financial reporting standards, and more often than not the private company is a pass-through or disregarded entity for tax purposes. Private companies are generally as they are labeled, i.e., private and with little to no disclosures of information to the public.  

In addition, public markets also do not normally differentiate, except in cases of control, why a seller is selling or why a buyer is buying. That is very different than a private enterprise. A company may have a different value depending upon the characteristics of the deal. That can be a strange concept, but that understanding is the focus of this article. 

The better you understand some very basic concepts of standard of value and understand where a potential buyer fits within that standard, the more likely it is the seller will have a successful transaction and maximize their return.


The most widely recognized and accepted standard of value is fair market value, which is generally defined as the cash or cash-equivalent price at which a property changes hands between a willing hypothetical buyer and a willing hypothetical seller, both being adequately informed of the relevant facts and neither being compelled to buy or sell. 

Note the emphasis on hypothetical and not a specific or particular buyer. In other words, fair market value would apply to a financial buyer, which is a type of buyer that is primarily interested in the return that can be achieved by the purchase and not necessarily by any unique aspects of the company to the buyer. 

Moving from hypothetical to specific, we can introduce the concept of investment value, which is generally defined as value to a particular investor, based upon individual investment requirements, as distinguished from the concept of market value, which is impersonal and detached. This buyer may also be referred to as a synergistic buyer. 

While understanding the concepts of fair market and investment value are most important, it is also worthwhile to note the concept of stipulated value, also referred to as an agreed value or a contract price. 

The builders who have partners or fellow owners may have this concept imbedded in their partnership agreements, operating agreements, or stockholder agreements. These may be based upon a formula or a fixed price which can be adjusted periodically. We see this regularly and often assist our clients in developing the structure, but since the concept often limits the market for the exit for the parties to the agreement, this concept is noted but not further discussed. 

There are other standards of value unique to specific circumstances, such as fair value or liquidation value, but most of the time these are not considered in an arm’s length transaction.


So after theoretical discussion, how is this applicable to a shed builder seeking an exit? Perhaps some actual examples might bridge the gap from theory to practical application. The following are examples of real exit (or the offsetting purchaser) transactions:

A commercial enterprise is selling a percentage of its equity to a private equity (PE) company. The PE is hoping to use this acquisition as a platform for roll-ups of other acquisitions in the same industry. This would be considered a buyer focused on the standard of investment value, as the price they are willing to pay is very specific for their business strategy. This is a synergistic buyer, which recognizes the unique synergies that make the combined entities more valuable than the sum of the individual entities.

A technology-driven medical practice is selling to a multi-specialty medical group in a roll-up strategy. The value using a true fair market value standard would likely be higher than the proposal from the buyer; however, there are unique relationships that will result from the transaction and will influence the final terms, with hopes that the longer-term relationships will provide for specific seller objectives.

A major vendor of a supplier seeks to acquire a line of business from the supplier, in a vertical integration strategy. The final value will be driven more by the synergies to the buyer than strict fair market value analysis. 

A large manufacturer is working to complete a generational succession strategy. The company has been appraised using standard valuation methodology, but the final deal terms will be negotiated among the family members,  Failure to agree could lead to an arms-length transaction to either a synergistic buyer in the same industry or a financial buyer, most likely a small private equity company. 


The key is that transactions can be complicated. Value is often driven by buyer-specific objectives that usually have a basis in fundamental valuation approaches, and those fundamentals will likely be negotiated over time.  

This article has not focused on a number of very critical aspects of value and valuation theory, such as methods of computing value, company-specific due diligence, how the tax structure can impact value and negotiations, how financial or company-specific risk can impact value,  the myriad possible discounts and premiums, and countless other topics. 

Valuation science merges with economic reality when dealing with actual buyers instead of the theoretical buyer in the fair market standard of value.

Owners of private companies tend to overvalue their company. Therefore, it is wise to have a realistic expectation of value before the process starts in earnest. Any builder considering an exit should plan early.  Seek competent valuation, transaction advisory, legal, and tax counsel early and understand that the more you know the better you can navigate the many issues that may arise in the process. 

At a minimum, if you hire a business appraiser to place an estimate of value on your business, you need to understand the requested standard of value.  Unless you have a specific buyer you intend to influence with the appraisal, the result is generally a fair market value standard of value for a hypothetical transaction involving a financial buyer. 

However, if a transaction involves an investment buyer the discussion will generally shift to matters unique to the buyer. If the seller understands those synergies early, they may be able to capitalize on that fact receiving the most value for their business.

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