BUSINESS CATEGORIES: Where Your Company Fits In

by Peter C. King, VR Business Sales/Mergers & Acquisitions, CEO

Knowing where your company fits into the world of business is a must if you want to understand the dynamics of selling it. The rules that govern the sale of public companies like Ford, Microsoft, or General Electric are radically different from the rules that control the sale of private companies. Successful business sales are dependent upon managed expectations for both those exiting or entering business ownership. This brief overview is designed to help you understand the rules that control the sales of the three major categories of businesses.

“Wall Street” – These are the public companies traded on stock exchanges around the world. The rules of their acquisition are taught in business schools, and their mergers and acquisitions are typically handled by investment banking firms. These companies have the objective of maximizing shareholder value. They are characterized as follows:

Earnings P/E Ratios: Measured in millions, after tax, typically more than 10 times earnings, often much higher depending on new technology or products.

Terms of Sale: Cash or equivalents (stock, warrants, etc.)

Management: Professionals, many layers.

Lower Middle and Mid-Market – These are typically substantial, privately held companies often earning profits in the millions of dollars. Comparisons to public companies for sales purposes, however, are misleading. Private companies do not actively trade their stock, which factors into the market value:

Earnings P/E Ratios: $1 million to multi-millions (various EBIT’s) 3 to 10 times earnings.

Terms of Sale: Cash, Seller Note and/or Third-Party Financing.

Management: Structured, owner involvement varies.

Small – These businesses may vary from situations where the owners play the central management and employee roles, to companies that demonstrate consistency in earnings and have solid organizational structures. In most small businesses, owner involvement in the day-to-day management is typical. Small businesses are the backbone of free enterprise economy and the marketplace for their sale is active. The greatest obstacle to the successful sale of these businesses is overcoming the seller’s perception of value and the buyer’s perception of risk:

Earnings: Generally less than $1 million (EBIT). Expressed as Discretionary Earnings (DE), which is defined as the money the business generates when the owner’s desire to reduce taxes is eliminated by reconstructing the financial statements.

Earnings P/E Ratios: 1 to 4 times DE.

Terms of Sale: Cash, down payment, may vary from 10% to 50%, Sellers Note and/or Third Party Financing.

Management: Owner a major element in the company’s operation.

VR has been supplying Valued Representation to small, lower middle, and mid-market companies since 1979. Our international organization takes pride in affording to these businesses the professional Valued Representation typically available to Wall Street companies, but impossible to secure as a family owned, founder operated or privately held enterprise.