Knowledge is power.
Selling your business is a big decision. It's a bittersweet time in your life as you say goodbye to all the years of hard work. Before you begin, there are many things to consider.
Below are some insights we think you should know as you prepare for your exit. Learning how you can achieve it can make you want to do it.
It's time to pass on the reins!
Determining the Value of a Business
Selling your company is a once-in-a-lifetime occurrence that not only impacts your legacy and financial health, but is also an emotional experience requiring time and preparation. A formal valuation from a qualified business broker can alleviate some of the pressure of selling and can assure you that you're receiving fair compensation for a lifetime of work. Even if you're not close to selling, receiving a complimentary valuation in advance of your exit can help you to address problem areas so that your retirement is well-financed.
Determining the Value of a Business
The value of a business is primarily determined by the cash flow generated by the business. But the ultimate price of a business isn't solely dependent on how positive or negative the cash flow is, but how much someone is willing to pay to receive that cash flow. A number of factors come into that equation, and receiving a formal valuation from a qualified business brokerage provides you with invaluable information to justify the price at which your company should sell.
Valuations take into account a multitude of factors, consisting of a review of the company's historical and projected financial performance, major competitive indicators, and the individual company's strengths and weaknesses. Also important is any risk pertaining to industry, operations and company cash flow. Even if you're not planning on selling this minute, this month or this year, understanding where your company lies can help you to understand your particular risks, and help to aim your goals toward helping you achieve maximum value.
In general, there are three main types of methods to valuing a business. Each contain their positives and negatives, and each can be particular to an industry:
When a business faces special circumstances or is not recently performing as it should or has in the past, an industry standard valuation is often employed. Perhaps there was a personal health concern that affected the owner's ability to properly run the business, and in turn the sales suffered.
The Industry Standard Method is used most often for bars and restaurants, where the cost of goods and earnings can vary greatly depending on management and owner involvement. In this instance, research into the local or national averages of sales in relation to cash flow helps to put into perspective how a particular business would perform if run properly.
Cash Flow x Multiple
As the most common form of valuation, the Cash Flow Method takes the business' profits plus the owner's salary and benefits, then adds non-cash expenses to determine an owner's normalized cash flow. Non-cash expenses include depreciation, interest and any personal expenses run through the business that a new owner might not necessarily have themselves.
The second most important part of this equation is the multiple, which is derived from many factors and applied to the cash flow to determine the value of a company. At The Firm, we subject a business to a 20-question, 100-point rating system that accounts for a company's industry strength. These include the ability for the company to survive without its owner, the skill of the employees and how easily the company can ride the tides of the economy and consumer demand. The average multiple is 3, indicating that a company's value is 3 times that of its cash flow.
Cost to Create
Similar to the industry standard, the Cost to Create Method is more a hybrid of the Cash Flow Method and the Industry Standard Method. The term "cost to create" considers the expense of recreating the exact same business in the same location, and the time and effort put into it.
Many businesses run into years of low profitability, and putting a price on cash flow alone would misrepresent the true value of creating that business. Much like the multiple in the Cash Flow Method, a business requiring a Cost to Create valuation would take into account longevity and reputation. A buyer interested in a business valued this way would most likely find it cheaper to purchase it as is instead of starting from scratch and expecting the same results.
We help business owners define their successful exit.
We customize our approach and strategies to maximize a business owner's results.
We confidentially coordinate and implement our tactics with an effective, industry-leading process.
3 Top Tips When Selling
Most business owners want to sell their business in order to maximize their years of investment. That's easier said than done and vastly different than listing a house with a realtor. The one thing both transactions need is an engaged seller willing to put in the time and effort it takes to walk away happy.
Here are a few tips to consider when you're thinking of selling your business:
1. Ask for a helping hand
As mentioned before, selling a business is often compared to selling real estate, but while one has standard forms and practices that vary little from instances, selling a business entails a whole host of factors that can affect a successful transfer of ownership.
Running your business hasn't been easy, so it's fair to say that selling it will be equally time consuming. The complications involved require professionals across many disciplines during each step of the process. You're not likely to do this more than once, so there's little time and room for a learning curve. Working with a trusted advisor with significant experience brokering business transfers gives you guidance and peace of mind when you need it most - the overwhelming and emotional stage of selling your company.
2. Leave on your own terms
The ideal time to exit a business is not when you need to, but when you want to. Most of us don't think about leaving a company when things are running smoothly and the bottom line is healthy, but planning for any contingency, near or far ahead, is an important part of any business plan. Not only does it alleviate stress should extenuating circumstances arise, but it helps you to determine how much you would like to walk away with, and what it would take to get there. When planning for your exit, consider these four points:
Selling when the market is good with a "nice" price
Leaving proud, comfortable and confident in the business' future and your legacy
Ensuring continuity for employees and clients
Retiring at the top
Ask yourself this: would I feel badly if these outcomes did not happen?
3. Be engaged in the process
Some businesses sell quickly and others take months or years to sell, and some never sell at all. The ones that do successfully sell rely on business owners and their advisors to be involved throughout the process and willing to go above and beyond for the deal. If you think your business may be a tough nugget to crack, don't wait until you're burned out and without energy to continue running the company while in the process of selling it. By being fully engaged and invested in the process before reaching the late stages of a deal, you guarantee yourself a quicker and smoother transition.
Selling a business is a time-intensive process, but our Brokers are equipped with the knowledge to make your experience as personal and efficient as possible.
Ways to Maximize a Company's Value
Your business is more than just your career - it's the cornerstone of your retirement. When you decide to sell, you'll be looking to maximize the company's value in order to generate the most liquidity that you possible can. After all, your business is your largest asset. Below are four ways to increase your company's value so that you can provide yourself with a great retirement.
Each business owner aims to increase profits over time, but few consider the current profitability and its importance to buyers. Surefire ways to increase profitability and boost value can be found by reducing overhead and addressing inefficiencies. Identifying key markets for growth helps a buyer to see where they can take the company in the future. Not understanding the profit potential of a business can kill a deal.
Develop Recurring Revenue
While some businesses can continue to show profit and increased sales without really diversifying their client base, focusing on this area in the revenue stream further helps to demonstrate the value of a company's product. Continuing to find new clients, even when you've begun thinking about selling, helps a future owner to understand a company's revenue trends. Securing new contracts and renewing existing ones also helps a buyer to see how the business earns revenue.
Get a Dream Team
A great idea will go nowhere without the right people to put it into practice. As a business owner, you know full well that key employees allow you to focus on the business while they work in the business. If you've hit some stagnation, consider hiring new talent, reevaluate your hiring and training practices, or shuffle around your management team.
If your company is able to support it, offer employee stock options. Giving them a stake in the company allows them to take a more active interest in the overall health of the company and also decreases turnover.
Perform Due Diligence
Due diligence is part of business transactions on any level. You constantly engage in due diligence as part of good business practices. You wouldn't carefully weigh a new employee or new vendor without research. A business buyer will do the same, but on a more detailed basis.
Consider practicing due diligence on your company. You just might find areas that are lagging or in need of attention. A buyer will spot any deficiencies right away, and the sooner you address them from internal eyes, the more attractive your business will be.