I”™m not ready to retire but I”™ve been thinking about what to do with the business when I am ready to get out. How do I go about valuing it? I”™ve heard people get multiples of earnings. What does that mean?
Planning your exit is a smart thing to do. There are lots of ways to exit and many things people are willing to pay for. Determining valuations can be complicated. Pulling off a significant sale is something you build toward.
Working toward an exit makes the business stronger and easier to run in the interim. Put in place systems, procedures, management and skilled teams of people to do the work. Make sure the business is ready to move steadily forward without you when it”™s time to sell. The next buyer will be more likely to step in and pay a premium for a turnkey business.
Who are potential buyers?
There all kinds of people who might buy your business ”“ insiders (employees, family, friends), outsiders (vendors, strangers, competitors), companies in parallel industries, and forward and backward integrators. Make a list of the most likely types of buyers.
Think through what buyers would need to have in place to be successful. For example, a buyer that”™s strong in sales may want additional markets to sell into. A strong operations/delivery company may want a sales force. Some people just want a company that can run itself.
Do some research. Look at businesses similar to yours that have sold in the last three years. Who bought them and why? What other similar buyers are out there?
Methods for selling include outright stock purchase, transfer of stock over time, sale with owner financing, bank financing, private equity, owner consulting contracts post-sale to assist in the transfer, esop (employee stock ownership plan) and generational transfers. Learn how each option works. They all have pros and cons.
Valuing the business
Start to assemble a team of advisers who can assist with the run up to, and execution of the sale. Hire people to help you assess and strengthen the business. Test out legal, financial and investment advisers who have experience doing deals. Get the team working together well before it”™s time to sell.
When it comes to valuing the business there is no right number or formula. One of the most common valuations is based on earnings before interest, taxes, depreciation and amortization ”“ EBITDA. Most small businesses do not have their books set up to reflect this because they are practicing tax accounting instead of business accounting. Maximize sale value by working with a business adviser or analyst to switch to business accounting.
The multiples a buyer will pay vary greatly and aren”™t always rational. I”™ve seen businesses practically given away, and others that earned 2-digit multiples of EBITDA. Turnkey has a value. So does a track record of revenue and profits. Proprietary systems and patents can increase share price. Having a lock on a market, whether because of exclusive relationships, control over products or top secret methods increases the value to people who want into that market.
The price is set by the market. Just because you want a specific price doesn”™t mean you”™re going to get it. Having a relationship of trust and integrity with the future buyers may help in the negotiations.
Looking for a good book? Try “11 Things You Absolutely Need to Know About Selling Your Business,” by John Dini.
Andi Gray is president of Strategy Leaders Inc., www.StrategyLeaders.com, a business consulting firm that specializes in helping entrepreneurial firms grow. Questions may be emailed to her at AskAndi@StrategyLeaders.com or mailed to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514. Phone: 877-238-3535. Visit www.AskAndi.com for archived Ask Andi articles.
