When trying to attract buyers that will make a fair bid for your school, you first need to have a good understanding of its value. M&A advisors and professional appraisers can provide you with information that will help you from setting a reasonable fair market value price to favorably negotiating your deal’s final terms.
Many school owners hire a professional appraiser at some point to review their company’s books and operations and provide a ballpark estimate of its value. An appraiser’s services can also be useful when you’re ready to sell your school.
One of this professional’s critical tasks is to normalize earnings – that is, to adjust them to better reflect your company’s performance under different ownership. The appraiser might make adjustments to earnings for one-time expenses, such as tax penalties or legal costs. And adjustments generally are made for discretionary expenses such as inflated (or artificially low) salaries and bonuses, and nonessential items such as club dues or company-owned vehicles.
An appraiser will also consider your accounting method. Many schools use a cash basis accounting system, which can accelerate expenses such as depreciation, ignore expenses like debt and defer revenues such as completed contracts for more favorable tax treatment.
Your company will look more attractive to buyers, however, if income and expenses are converted to an accrual basis, which records these items in the period they’re earned or incurred.
In weaker economies, an appraiser might project your company’s future earnings under more favorable economic conditions, based on your historical numbers. These projected earnings can be particularly useful when sale negotiations get sticky and you need evidence for your price position.
PRICING FOR THE MARKET
Although a professional appraisal can give you a general idea of your company’s worth and make your financials appear in their best light, you also need M&A advisors to help you set a reasonable market price. Ultimately, your company’s value is the price a buyer is willing to pay – regardless of the number you have on paper.
Companies with powerful value drivers such as proprietary technologies, critical patents or market-leading brands may merit a higher price than standard multiples suggest.
In setting a price, M&A advisors might consider variables such as the current economic environment, the M&A marketplace, conditions in your industry and recent sales prices of schools comparable in size, history, current cash flows and future earnings projections, among other characteristics.
This information might be used to set a price based on your company’s earnings before interest, taxes, depreciation and amortization (EBITDA), with three to six times EBITDA at the low end and seven to 10 times EBITDA in the higher range.
Companies with powerful value drivers such as proprietary technologies, critical patents or market-leading brands may merit a higher price than standard multiples suggest. If you or your M&A advisors already have a potential buyer in mind, your initial price will likely reflect what the buyer considers your company to be worth. A competitor, for example, may be willing to pay an above-market price to eliminate you as a threat and gain access to valuable territories, top-performing workers or complementary product lines.
Your advisors can also help you take steps to enhance your school’s attractiveness and potentially boost its price. For example, you may need to clean up your workplace, repair or dispose of non functioning equipment and ensure that your employees look and behave professionally.
However you arrive at a value for your school, keep in mind that you’ll need to remain flexible and open-minded throughout the M&A process. Potential buyers will have their own opinion of your company’s value; and if the parties’ positions are vastly different, price negotiations are likely to go nowhere.