I’m not ready to retire, yet. 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 my business? I’ve heard people get multiples of earnings. Exactly what does that mean?
Planning your exit is a smart thing to do. There are lots of ways to exit. And, there are many things that people are willing to pay for. Determining valuations can be complicated. Pulling off a significant sale is something that you build towards.
Working towards 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 that the business is ready 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.
There all kinds of people who might buy your business. Insiders (employees, family, friends), outsiders (vendors, strangers, competitors), companies in parallel industries, forward and backward integrators, are all possibilities. Make a list of the most likely types of buyers for your business.
Think through what different likely 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 3 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 option purchase), and generational transfers. Learn about how each of these options works. They all have their pros and cons.
Start to assemble a team of advisors 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 advisors, who have had 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 EBITDA, or Earning Before Interest, Taxes, Depreciation and Amortization. Most small businesses do not have their books set up to reflect EBITDA. That’s because they are practicing tax accounting instead of business accounting. Maximize sale value by working with a business advisor or analyst to switch to business accounting sooner rather than later.
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 cache and 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 of the company to people who want into that market.
Remember that 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. Add on an experienced negotiating team, backed up with solid facts about what the business has been, and is capable of, doing.
By now I’m hoping you get the idea that selling the business means working over time towards a successful outcome. If you have 5 – 10 years, or more, to go before you retire, you’re in luck. If you need to get out with the next 5 years, you’re going to have to work quickly. If you have less than 3 years to exit, planning how to get out has to be your top priority day in and day out.
Looking for a good book? 11 Things You Absolutely Need to Know About Selling Your Business, by John Dini.
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Andi Gray is president of Strategy Leaders Inc., www.StrategyLeaders.com, a business consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at 877-238-3535. Do you have a question for Andi? Please send it to her, via e-mail at AskAndi@StrategyLeaders.com or by mail to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514.
