More and more owners of small and medium-sized companies are considering the advantages 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. In order to maximize the value of 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. Preparing in advance will not only help you to be ready when the time comes, but it can often help guide you to build your business into a more desirable, and therefore, more valuable business.
Below are some questions that are 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. Planning should begin three to five years out, but you should actively start the process at least one to two years before you want to complete the transaction. It usually takes at least 6 to 12 months to sell a business and the buyer may ask you to stay on for a transition period after the sale. Larger or more complicated transactions may take longer than one year.
How Much Is My Business Worth?
There is no simple method to determine value, and there are numerous formulas for valuing a business. No matter what valuation method is used, the value of a business is ultimately determined by what a buyer is willing to pay. Our experience with completing over 1,000 transactions spanning four decades has shown that there are three key components that are used in valuation models:
- Earning Power – Earning power 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 to SDE (Seller’s Discretionary Earnings) by adding back the expenses attributable to private ownership and accounting for the salary of one owner.
- Specific Assets Being Sold – The appraised or fair market value of the assets being transferred, as well as other value drivers unique to the specific business, are also considered.
- Marketplace Demand – These factors are overlaid on industry and transactional market data to come up with an appropriate capitalization rate, which is then applied to calculate a range of value for the specific business.
How Do I Get the Best Price?
To maximize your price, you need a steady record of profits, hard assets on your balance sheet, 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.
What Are Buyers Looking for in a Business?
Most investors place extensive weight on the company’s ability to generate earnings since the cash flow allows them to:
- Pay themselves a suitable salary
- Service the debt generally required to buy the business
- Receive a return on investment
Other buyers could be looking to acquire market share, skilled employees, or an add-on business that helps them to vertically integrate their organization.
How Do You Find the Right Buyer?
Most offers don’t appear out of the blue…they must be solicited. Even so, discretion and confidentiality are usually crucial. Key employees, customers, and suppliers have been known to vanish if a company’s future seems in doubt. An experienced Business Intermediary will know how to confidentially market your business while optimally engaging the largest qualified buyer pool possible.
Do I Need the Assistance of a Business Intermediary?
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. A knowledgeable Intermediary can help you avoid pitfalls, save time, reduce stress, and help you get the most value for your company.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
Inspiring business relationships since 1982!
(originally posted in the July 2018 newsletter)