The value of your business depends on many factors, including its size, location, industry, and competition. This article will unveil the “mystery” of valuing, and selling your business. Our goal is to provide business owners with the knowledge and guidance in making the absolute most out of selling their business. Our mission is to change the stats of that 3/4 businesses that go to market do not sell, and of those 25% that do, many of them are sold at a much lower valuation that the owner needs.
Understanding Potential Buyer Profiles
A strategic buyer is a company that acquires another company in the same industry to capture synergies. The strategic buyer believes that the two companies combined will be greater than the sum of their separate individual parts and aims to integrate the purchased entity for long-term value creation.
Financial buyers look to generate cash flow by boosting revenue, cutting costs, or creating economies of scale by buying similar companies. Financial buyers are also focused on what exit strategies the investment or company might offer, such as an initial public offering (IPO) or even a sale.
Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt. Most private equity firms (that we know of) won’t even look at a business if they are under $1M in EBITDA. For informational purposes only, PE firms look at about 900-1000 opportunities a year, submit offers on 10-20, and accept 1-3… per year. Statistically, it is very rare to find a private equity firm willing to purchase your business. However, pursuing a PE acquisition can lead to one of the biggest multiples for any business owner when compared to like size and industry.
For the sake of this article, I will define the “inside sale” options, but will not go into deep detail.
Family (generational) Transfer
- When the owner of the business sells their shares to their children and transfers their business to the next family generation of owner(s).
Management Buyout (MBO)
- When there is a management team that collectively opts to purchase the business from the owner(s) of the business.
Employee Stock Ownership Plan (ESOP)
- An employee stock ownership plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company in the form of shares of stock. These can be very complicated and are best handled by specialists in this area. Most firms that broker ESOP deals only consider businesses with at least 20-30 FT employees, and a minimum of $1M in EBITDA.
How is a Small Business Valued?
The value of your business depends on many factors. There are many different ways to value a business as well. For the small business market, the most commonly used valuation methodology is to first determine the Discretionary Earnings (DE), also referred to as Seller’s Discretionary Earnings (SDE). SDE includes add-backs, and a few other minor factors that can allow to manipulate this number.
After you determine the SDE, you then use a market-multiple that is dependent on many other factors (both tangible and intangible). Most of the time, professional software, is required to determine the market multiple. Common resources used are Business Reference Guide and DealStats which we will sometimes use to help our clients better understand the specific industry benchmarks, and value their business.
Factors That Determine Readiness to Sell Your Business
There are many considerations when looking at how READY your business is for a transaction, as well as how ready YOU are as the owner of the business. We have a few of the major categories listed here and some questions to consider your own “readiness” that we will look at when determining the value of your business.
- Does the business show a steady increase over the last two to three years or at least a consistency in profit?
- Do you have case studies of where the products or services have been used and the benefits that your products or services have demonstrated to the customer?
- Do you have a list of your community involvement?
- Does the brand name suit the image of the company?
- Does the business name include the business owner’s name?
- Could a potential purchaser add any weight to the purchase price because of the brand?
Marketing Documentation & Systems
- Does your marketing look systemized as though it will be easily replicable when you leave?
- Do you have a list of past advertising and promotional campaigns?
- Do you have copies of past sales letters and promotional material?
- Do you monitor the success of these sales and marketing campaigns and do you have a record of past performance?
Employee and Management Issues
- The business is not reliant on a single person or this is not the perception?
- Have you considered if the business can be expanded to rely on multiple people?
- Have you decided which of your employees will take over the role of the owner?
- Have you developed a plan that details what tasks will be done by which employees?
- Have you planned what training is needed to get employees qualified for their new roles?
- Have you planned the time frame when the new roles should commence and whether some tasks need to be delegated immediately?
- Has an organizational chart been developed with summaries of the key employees?
- Do you have 2 years of tax returns or audited statements available?
- Do you have documented an analysis of your key customers?
- Have you determined your profit plus add-backs and have this available in a reconciliation statement?
Management Systems and Forecasts
- Have you prepared a detailed forecast with justification for the next 12-24 months?
- Do you have a scorecard or management control system that adds weight to this forecast?
- Have you prepared a 3 year forecast?
- Have you printed and have readily available your company formation “memorandum of incorporation” paperwork?
- Have you printed and have readily available the address and contact details of other shareholders?
- Do you have readily available a list of all trademarks and documentation with expiration dates?
- Do you have readily available a list of all domain names, documentation and expiration dates?
- Do you have in a single file a list of customer contracts?
- Do you have in a single file a list of strategic alliance partners?
- Do you have in a single file a list of support/maintenance contracts?
- Do you have in a single file a list of other customer-related contracts?
- Do you have in a single file a list of supplier contracts?
- Do you have in a single file a list of leases/finance contracts?
- Do you have in a single file a list of all web hosting agreements and documentation?
- Do you (and all major shareholders) understand about valuation methodology as this will impact on negotiations?
- Do you (and all major shareholders) understand about the key criteria that a buyer will be looking for?
- Is there a CRM or contact management system in place?
- Is the accounting system streamlined to show management reports such as sales by product, customer, receivables, payables etc?
- Is the customer database clean and managed without duplicates and a high degree of accuracy with company and contact details?
- Is the enquiry database clean and managed without duplicates and a high degree of accuracy with company and contact details?
- Are records kept and analyzed?
- Are your tax returns up to date?
- Are your tax, Sale (State) Tax or VAT obligations met?
- You manage the following expense area very well and cannot leverage any extra profit- Telephone, Insurance, Banking, Overdraft, Inventory, Payroll, Costs of Goods, Commission, Human Resources
- Have you fully examined immediate revenue expansion programs such as increasing your average value sale?
- Have you fully examined immediate revenue expansion programs such as increasing the frequency of purchase?
- Have you fully examined immediate revenue expansion programs such as increasing the number of customers?
- Have you fully examined immediate revenue expansion programs such as increasing the number of leads?
- Have you fully examined immediate revenue expansion programs such as improving your conversion rate?
- Have you considered new products that can be launched into existing markets? Have you considered new products that can be launched into new markets?
- Have you considered existing products into existing markets (Repackaging, rejuvenating)? Have you considered existing products into new markets?
What Determines Attractiveness of Your Business
Just like readiness, there are many factors, both tangible and intangible, that determine the ATTRACTIVENESS of your business. When your business is highly attractive, one of the biggest areas we focus on with our clients, your business will naturally be on the highest end of your industry Range of Value. Here are a few of the considerations:
Years of Business Operation
How long have you been operating your business? In your industry is this considered good?
Would your management team impress a potential purchaser?
If a business has too few customers, then there is a higher risk that the business may falter if one of the customers ceases trading. Do you therefore have a reasonable customer database?
Business Owner Reliance
The less reliant on key managers, the more attractive your business is to a potential purchaser and therefore the higher your score.
Do you have good marketing systems in place that lowers the risk of winning new business?
Do you have good business systems in place? Business systems could refer to CRM, accounting and production systems as well as strong policies and procedures that are well implemented.
Potential Profit Growth
Are you predicting that your business will continue to grow and be profitable?
Predictable Revenue Streams
Are your revenue streams predictable? Can a third party look at your business and feel comfortable that in your absence the business will achieve the financial forecasts?
Recurring or Subscription Revenue
Does your business have recurring revenue streams?
Strong Growing Market
Is the market a strong growing market? The better the growth the more attractive the business.
Are you a strong player in the marketplace? The stronger your presence, generally the more attractive your business.
Does your business operate in an industry or marketplace that has a good economic outlook?
Reasons for Selling
You need to have a legitimate reason for selling. Don’t say you are selling because you are sick of all the headaches.
Take Our Assessment to Determine What the Value of Your Business Is
Hopefully, this sheds some light as to how we all determine the value of your business. There are tons of questions and considerations any valuator will go through to value your business. One simple and FREE way to get your valuation benchmark is to take our Estimated Valuation Assessment. This will measure you business on 8 different major valuation factors, and spit out an estimated valuation range of your business based on the results.
Alternatively, you can schedule a consultation call with one of our experts advisors to learn how we can best support you to grow the VALUE of your business
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