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When a Flemington-based niche legal consulting company called Med League recently went on the market – and sold for the asking price in two weeks – the speedy transaction demonstrated the market demand for a well-positioned enterprise. But it also reflected a number of other trends, including how the graying of America is opening the way for the next generation of entrepreneurs.

The goal of many business owners is to build a sustainable company that, at some point, can be sold to someone else. This will help secure the future of the original owner or owners by monetizing their investment, while giving the enterprise’s new owner(s) the opportunity to build on an established base and expand the company’s success.

Finding a buyer, though, involves a lot more than just putting up a “For Sale” sign in a window. There are a lot of moving parts, from establishing a reasonable sales price to connecting with a potential buyer. And of course, during all of this, the current business owner must continue to run their company. Fortunately, third-party brokers and valuation experts can do a lot of the detailed legwork, drumming up interest and potentially giving owners the freedom to choose from a number of offers. NJBIZ spoke with some specialists to get the lowdown on this end-stage activity.

“Recently, I undertook the valuation of a niche professional service business catering to attorneys nationwide,” said Michael Meyer, a partner with the business sales, mergers and acquisitions firm Benjamin Ross Group. “This unique company, Med League, specializes in providing a range of services to legal professionals, including summarizing medical reports, and supplying expert witness nurses and physicians to both plaintiff and defense attorneys. What made this valuation assignment particularly challenging was the scarcity of comparable businesses in the market.”

Not many companies offer similar specialized services, “making it difficult to establish benchmarks for comparison,” he explained. “Despite these challenges, we employed a meticulous approach, leveraging our industry expertise and market knowledge to assess the business’s financial performance, growth potential, and unique value proposition accurately. By carefully considering all relevant factors, we were able to determine a fair and competitive valuation for the business. The business went under agreement for full price in two weeks from initially marketing the business.”

But a success story like that is hardly a slam-dunk. Positioning a business for sale involves navigating a number of challenges, “from determining the appropriate valuation to effectively marketing the business to potential buyers,” Meyer cautioned. “When proposing a sale price or valuation, several key metrics come into play. First, I assess the financial health of the business, including revenue, profit margins, and cash flow. Additionally, I consider market trends, industry comparables, growth potential, and the unique value proposition of the business. Setting realistic expectations for our clients is paramount, and sometimes challenging. Rightfully so, business owners often have a deep emotional attachment to their business and may overestimate their value. Hence, it’s imperative to establish honest and accurate expectations to facilitate a smooth transaction process.”

Digital advances mean the process of putting a business on the market has changed dramatically, he added. “The marketing of businesses for sale has undergone significant transformation since the late 80s,” according to Meyer. “Back then, print advertising in newspapers and magazines were the primary marketing channels. Since then, digital platforms and online marketplaces have become increasingly pivotal. Now we employ a multifaceted approach, leveraging a blend of online listings, targeted outreach, and networking within industry circles to enhance exposure for our clients’ businesses. Additionally, we’ve invested in building a strong buyer database, which now generates 70% of our leads. This reflects our commitment to staying abreast of changing market dynamics.”

Meyer said artificial intelligence has a place in the process, but it’s not exactly crowding out the human element. “While AI technologies can help analyze historical financial statements, provide market data and industry trends to help determine a company’s financial health and growth potential, we place significant emphasis on our expertise and industry knowledge when conducting valuations,” he explained. “Human judgment and experience remain indispensable in interpreting complex data and understanding the intricacies inherent in each business.”

Bracket creep

And as the median age of Americans creeps up – currently, roughly 62 million adults ages 65 and older account for 18% of the population; by 2054, 84 million adults ages 65 and older will make up an estimated 23% of the population, according to the Pew Research Center – older business owners are looking to cash out and sell.

“In recent years, I’ve observed a trend of more business owners seeking business valuations and advice in order to sell,” Meyer observed. “This can be attributed to various factors, including an aging demographic of business owners looking to retire, still-favorable market conditions, and increased awareness of the importance of strategic planning for exits. Moreover, business owners who have successfully navigated through the challenges of recessions and the COVID-19 pandemic are now feeling more confident about their businesses and are ready to transition to the next phase of their lives.”

Despite higher interest rates, valuations are increasing as buyers look to the long term. “Business valuations are influenced by numerous factors, such as the financial health of the business, market conditions, industry dynamics, growth potential, and unique value propositions. Recent trends have generally seen valuations trending higher,” Meyer explained. “The impact of higher interest rates cannot be overlooked, as increased borrowing costs can dampen valuations to some extent. Despite these complexities, the universal trend suggests a positive outlook, supported by strong demand from buyers and favorable economic indicators.”

Amid these developments, a variety of metrics may be used to determine a sales price for a business, according to Anthony Pumphrey, a Princeton-based managing director at Valuation Research Corp., a full-service, independent, global valuation firm that focuses exclusively on valuations and advisory services. “One issue is the quality of the books and records,” he said. “The process is easier if there are audited financials. But in the absence of that, we can make operational comparisons based on comparable businesses; and our trained professionals can also compare assets and functions to help determine market value.”

That process can involve a deep dive, he added. “Say two companies make office chairs. One may have patents on their manufacturing process, or may own real estate and machinery, while the other has minimal assets and outsources many functions. So, they may appear similar at a high level, but when you scratch the surface, you’ll see the two are actually quite different for valuation purposes. So, it’s not an open-and-close process.”

Pumphrey and his team recently valued a branded food company with a “few thousand” employees that has operations in New Jersey. “The company has a strong brand identity, but it operates in a few segments so there were no simple comparables,” he said. “To arrive at an accurate valuation, we developed blended composites from multiple companies and industries and then weighted them for their market approach. We also used expected cash flows of our client company and weighted them to arrive at a discounted, or net present value. Finally, we considered whether the composition of value adequately captured the value of intangible assets, like the client’s brand value, to arrive at a suggested number.”

First-person account:

For more than 80 years, Siciliano Landscape Co. operated as an independent, family-run business. The company is now part of a much larger business. Click here to see why the owner decided to sell – and what that process was like.

The market value of a business may also be influenced by the kind of acquirer. “A ‘strategic buyer’ may already be in a similar industry and is looking to consolidate the target company for synergies and value-added,” Pumphrey explained. “In contrast, a financial buyer, like a private equity firm, may view the target as more of an investment, relying on their management expertise, with an exit strategy and exit date planned in advance.”

Purchase consideration can also affect a valuation, he said. “Cash is most straightforward, but if a payout will be made over multiple periods, then we have to consider such issues as interest rates and risk premiums. Also, if some or all of the consideration will be stock based, that can raise other risk and valuation issues.”

Since 2022, Pumphrey has seen a slight pullback in deal pricing, thanks to higher interest rates – which makes capital more expensive – and reduced multiples of EBITDA, a commonly used performance measure. “We’re also seeing more interest in non-cyclical industries, like accounting and advisory, and health care companies,” he said. “There’s been a slight rotation away from cyclical businesses like manufacturing and retail.”

Companies like VRC are beginning to use artificial intelligence to assist in valuations, but Pumphrey said AI is still in the early stages. “Valuation is all about turning information into prices,” he noted. “But the availability and usefulness of data can vary a lot. AI depends on the frequency and quality of data, for example, but privately held companies typically do not reveal much; and even when publicly held companies are releasing historical data, they’re not telling what you they’re doing on a minute-by-minute basis — and their forward-looking data is usually pretty limited. So, AI will be a useful tool, but for valuation purposes it’s not there just yet.”

And while certain generalizations may hold true, “every business is unique, and that’s reflected in its valuation,” Pumphrey clarified. “So, before you can consider market multiples or other metrics, you have to understand the brand, the assets, functions, and how the business operates. There are no simple or fast answers when it comes to business valuation.”