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and current inventory, to arrive at the company’s value. Often bankers who do not have experience with database-driven, direct marketing companies attempt to value businesses with this method. You’ll see bankers place a higher value on the computer that runs the database than on the data within the computer! (And we wonder why banks are in a financial mess?) The liquidation method is a doomsday valuation that significantly undervalues any going concern, especially leanly run direct marketing companies.
The most common approach favoured by the direct marketing industry is the price-multiple method. This technique takes a business’s net income and multiplies it by a going factor to arrive at the purchase price.
The first aspect to consider with this method is net income. When business owners realise that their buyers will likely use this method, they will often make a fundamental mistake and cut marketing expenses the year or so before their intended sale date. The rationale is that they’ll have one huge year of net income and reap a larger selling price. There are three fundamental flaws with this
strategy. The first is that investors use a three-year average to determine net income rather than a single year. The second problem is that the cut in marketing expenses sticks out like a sore thumb on the balance sheet. This inevitably leads to a recasting of the net income for that year, as if the marketing expenses had maintained an even keel. The third problem is that if you can’t find a buyer, you’ve hurt your business growth by cutting back too much from your marketing. Of course, this makes the business less attractive to a future buyer.
If your EBITDA is below the 7 percent threshold, or you’d like to see it higher, there are techniques to improve the health of your business and actually make it more attractive to purchase. Conducting a quick benchmark analysis is the first step to determining which expenses are too high. A little investment in this effort will help you determine what to change to make the necessary improvements in your business.
Resist the urge to slash marketing expenses. If you suspect that your marketing expenses are too high, you’ll want to develop a strategic plan to prune unproductive efforts and to focus on the higher responding promotions. Buyers like to have a successful marketing track record that they can follow, so your efforts will pay off for both your immediate profit and for your future sale. The second aspect of the price-multiple method is to determine which multiple will be used. In the heady days of the dotcom bubble, multiples skyrocketed into the low double digits and even into the teens. Today for smaller catalogue operations, we’re seeing multiples of five to six, with the more desirable properties going up to seven. It is possible that some companies will go for more or less, but this is the range that many buyers are willing to pay now. So if you want a quick valuation of your company, take your three-year average of net
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income and multiply it by five and by six. Of course, there’s a bit more to it than this, but it will give you a reasonable range of what you can expect in today’s market.
For example, if your three-year average net income is £100,000, you can reasonably expect a price between £400,000 and £500,000.
Build your reputation Investors want to buy businesses from people they
trust. Often the best candidates to buy your business are your competitors. If your relationship with them is sour, it makes a future transaction less likely. Assume that potential buyers will make discreet enquiries about what it is like to do business with you. Ensuring that you have a good reputation with your vendors and industry contacts increases the chance that you’ll find the right buyer.
Assemble your sales team Buyers often bring a team of experts to conduct
the due diligence of their acquisition target. Sellers need to assemble their team too. This is not a go-it- alone proposition. Unfortunately in today’s litigious society, a transaction isn’t necessarily completed when the documents are signed and the cheque exchanges hands. A few thousand pounds spent in experienced legal, accounting, financial and business advice will be money well spent. You probably didn’t enter your business the way Elvis walked on stage at a concert. However, with some planning, you can make an exit worth remembering.
increases the chance that you’ll find the right buyer”
have a good reputation with your vendors and industry contacts
“Ensuring that you
George Hague is principal of HagueDirect, a full-service marketing firm.
Direct Commerce Catalogue e-business
www.catalog-biz.com
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