Selling Your Business. This is the fifth in a series of articles that will provide information to business owners who are starting to think about exiting their business. Should you wish to learn more about how to plan for your exit, contact Donald Stevens at firstname.lastname@example.org or visit http://www.donaldstevenscfo.com/.
How Much is My Business Worth? The $10 million, $20 million, $30 million question.
B2B CFO® surveyed business owners on what were their biggest concerns related to selling their business. Sixty two percent of respondents identified business valuation issues as their top concern. This is not a surprise, valuing a business is a complex process. Business valuation experts utilize various methodologies when performing valuations. There is an alphabet soup of methodologies such as discounted cash flow (DCF), comparable company method (CCM), etc. The business valuation expert will select methodologies based on various factors including reason for the appraisal and type of company. They may also use multiple methodologies and average them. What none of these methodologies can do is determine the price a willing buyer and a willing seller will agree to in a business sale transaction.
The most common valuation methodology utilized in business sale transactions is the EBITDA method (Earnings Before Interest, Taxes, Depreciation and Amortization). This is an adjusted earnings-based methodology that applies a multiple to calculate the value of the business. As an example, if adjusted EBITDA is $1,000,000 and the multiple is 6, the value of the business is $6,000,000.
There are two components of the EBITDA method, adjusted EBITDA and the multiple. Let’s discuss the adjustments to adjusted EBITDA first. The earnings of the business will include potentially both revenue and expense items that will not carry-forward after completion of the sale. As an example, the owner’s teen aged son nominally works in the business on a part-time basis and collects $100,000 a year in salary. The buyer will not retain the previous owner’s son as an employee. As such, earnings should be increased by $100,000 to reflect that this expense will not continue upon sale. There can also be negative adjustments to income. The Company buys certain supplies at a 10% discount from a vendor that is owned by a fraternity brother of the owner, resulting in $500,000 a year in lower cost of goods sold. The only reason for the favorable terms is because of the relationship between the owners of the two businesses. Since this discount is unlikely to be available to the buyer, there should be a $500,000 adjustment reducing earnings.
It will come as no surprise that many business owners make decisions related to their businesses that result in a minimization of taxes. As you start to plan for selling your business, you may want to rethink these strategies. First, you will have third parties reviewing these strategies which you may not be comfortable with. Second, while some of these strategies may end up on the adjustments list described above, they may not all end up there. In this case, a deduction that saves you 40 cents in taxes, may cost you $6 in sales proceeds.
The Success Team™ introduced in my article titled “Is Your Business Saleable” https://www.losangelesorangecountyb2bcfo.com/is-your-business-saleable/ will thoroughly analyze the business to determine what adjustments should be made to earnings to normalize earnings. Your B2B CFO® will track these adjustments in B2B Exit® Software which will provide the business owner with an always available view of the expected value of the business.
The Sales Multiple
The second component of the EBITDA method is the sales multiple. The multiple a buyer is willing to pay is influenced by various factors including prevailing market conditions, industry specific factors and company performance to name a few. As I discussed in my article titled “Who Should I Sell My Business To” https://www.losangelesorangecountyb2bcfo.com/who-should-i-sell-my-business-to/, a significant factor is the motivation of the buyer. To recap, internal buyers will generally pay less than external buyers. For external buyers, strategic buyers will generally pay more than financial buyers. The investment banker or business broker on the Success Team™ will be able to provide guidance on the appropriate range of multiples that a business owner should expect when selling his / her business.
Are you ready to sell your business? Would you like to learn more about how much your business is worth? If you are ready to start planning your exit now or would just like to know more about what exit planning is all about, contact me, Donald Stevens at email@example.com or visit http://www.donaldstevenscfo.com/.
B2B CFO® https://www.b2bcfo.com/ has several resources that educate business owners, assist in developing exit strategies and ultimately assist in the execution of those exit strategies for owners of privately held businesses. These include The Business Sale Solution Seminar™ which is an educational program developed to prepare business owners for the journey they will take when selling their business. The Exit Strategy Handbook is a companion to the Seminar, providing further detailed information on selling your business. Our B2B Exit® Software serves as a project management tool and an internal valuation tool for preparing your business for sale. Most importantly, there are the B2B CFO® Partners, 220+ strong, located across the USA, each a highly experienced financial professional, and ready to guide you through this adventure.
Are you ready to begin planning for your eventual exit from your business? It is never too early to plan. Contact Donald Stevens, a B2B CFO® Partner, at firstname.lastname@example.org or visit http://www.donaldstevenscfo.com/.