Thinking about selling your business? More and entrepreneurs are considering the benefits of selling their businesses these days. Of the close to one million businesses that will change hands this year, most will involve privately held companies selling for $500,000 to $15,000,000. Yet, until business owners experience a merger or acquisition, few will know what to expect or how to proceed. In the lives of entrepreneurs, few events are more emotional – or significant – than selling their business. Entrepreneurs should always be thinking about the possibility of selling. The smart business owner should start planning for a sale and create a file labeled “Sale of the Business” years before they have any intention of selling. Below are some questions frequently asked by existing business owners.
WHEN IS THE BEST TIME TO SELL?
The optimum time to sell is before you are forced to do so by health or financial reasons. This places you in the strongest negotiating position. You should actively start the process at least one to two years before you want to complete the transaction, because it usually takes approximately 6 to 12 months to sell a business and the buyer may ask you to stay on for a transition period.
HOW DO YOU DETERMINE HOW MUCH A COMPANY IS WORTH?
There is no simple method, and there are numerous formulas for valuing a business. Our experience has shown that there are three key components that are used in computing valuation models: 1) earning power; 2) the fair market value of assets being sold; and 3) marketplace demand.
Earning power is usually the key driver to laue and is a function of annual earnings. For larger businesses, particularly those with audited financial statements, an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) calculation is used. For smaller businesses, the calculation is adjusted by adding back the expenses attributable to private ownership. An appropriate capitalization rate is then applied to calculate value. Most investors place extensive weight on the company’s ability to generate earnings, since the cash flow allows them to a) pay themselves a suitable salary; b) pay off the debt generally required to buy the business; and c) receive a return on investment.
The appraised or fair market value of the assets being transferred is also considered. These factors are overlaid on industry and market conditions to come up with a range of value for the business.
HOW DO YOU GET THE BEST PRICE AND FIND THE RIGHT BUYER?
To maximize your price, you need a steady record of profits, diversified customer base, a proprietary product line or a strong market position, and backup management that can run the business in your absence. Good accounting records are one of the most critical tools in maximizing value. Most offers don’t appear out of the blue…they must be solicited. Discretion and confidentiality are usually crucial. Key employees, customers, and suppliers have been known to vanish if a company’s future seems in doubt. Employees and competitors often are the worst buyers for a business. An experienced business broker will know how to confidentially market your business and give it optimum market exposure.
SHOULD YOU SEEK THE ASSISTANCE OF A BUSINESS BROKER?
Selling a company can be a long and time-consuming process. Generally, the best thing an owner can do is manage his business profitably while engaging an experienced intermediary to prepare a presentation package, screen prospective buyers, negotiate and evaluate offers, and perform the myriad of other necessary tasks associated with the selling process. In addition, an outside party brings objectivity and can act as a buffer between the buyer and you.
(originally published in the April 2011 eNewsletter)