How is Your Business Valued?

If your business exit strategy is to sell your business now or in 3-5 years, please read on. I consider myself blessed to work with successful entrepreneurs. I love to hear “the story”. How they started in a spare room or a garage with little or no money, grinding it out 80-90 hours a week. Now, after several decades, they have a very nice business. They are all extremely competent and confident in their field. But when it’s time to position the business to sell and maximize the benefit of all those years of focus and commitment, that is not their area of expertise. They realize that there are times that you need a professional. Advising business owners on the sale of their businesses is what we do. Of course, everything is confidential. None of our clients want their employees or customers to know that they are considering selling.

The first, and probably most important, step in the exit planning process is to know what you will do next after you sell the business. Will the proceeds from the sale of your business be adequate to fund what’s next?

We also have professional partners who can advise you on different ways to structure the deal and the tax consequences of each.

How Is your business valued?

Here is the conversation and information that I have shared with numerous business owners. At some point, every privately held business will be sold, transferred to a relative, friend, employee etc., or simply closed.

Some business owners operate their business without ever considering an exit plan. Then something unfortunate occurs. The business is not prepared to sell but must be sold quickly – and usually at a huge discount. We have seen this tragedy play out too many times.

Your business should be prepared to sell every day, that is, maintained at a level of maximum value.

What does “maximum value “mean? Your business, ready to sell at the highest price possible. Businesses are valued by a multiple of the cash flow, seller’s discretionary earnings, or EBITDA. This multiple can be anywhere from 1X to 10X and sometimes even higher, depending on the industry and the size of the cash flow. However, companies in the same industry can sell for dramatically different multiples, for the reasons you will see below.

What can you do to increase the value of your business?

1. Sales must be increasing year over year. Businesses with a decrease in sales will most likely be sold at a deep discount.
2. Recurring revenue is king. If all of your business is project based, the number of buyers interested will be less and the multiple will likely be lower.
3. Does your business have patents, a difficult barrier to entry, or some other proprietary aspect that adds value?
4. Gross profit well above average for your industry. Have you developed your business in a way that allows you to operate at a much greater gross profit than your competitors through developing a niche, specialty, or a brand identity?
5. Are you the business? Are you the contact for the customers and suppliers? Do your employees come to you with all issues? If you can’t leave the business for 30 days without fear of a disaster, you may have a business but it’s also a job. Most buyers are not interested in buying a “job”.
6. Customer concentration: Do you have 1 customer that makes up a large part of your sales or maybe 2-3 customers that account for the majority of your business? A buyer and the buyer’s lender will find this a concern as the loss of 1 customer could impact the bottom line greatly.
7. Supplier concentration: Same as above. If your business is dependent on only a few suppliers, this creates a huge issue.
8. Clean books are a necessity. Eliminate unnecessary personal expenses. Some owners live out of their business, making it difficult to determine an accurate cash flow number. Remember, all businesses are sold at a multiple of cash flow.
9. Operations manual: Are all of your business procedures documented, from receiving an order until the order is filled? Are all of your personnel policies documented, etc.?
10. Management team in place: Do you have a strong management team in place to operate the business in your absence? Do you have a succession plan in place? That is, have you identified people in your business who have the capacity to do more? Do you have as plan in place to provide mentoring, training etc., to grow these people into positions with more responsibility?
11. If you own a retail business or a business where your customers visit, how’s the curb appeal? When was the last time you remodeled? Buyers will be looking at your place of business with fresh eyes. Are the outside and inside up to date, modern, and appealing?
12. If you have any excess equipment or inventory not necessary to the operation of the business, clear it out. A buyer will not pay full value, if any, for the excess. Sell it now while you can take a little more time to get a better price.

By addressing these challenges before a business goes on the market, it will significantly increase the chances of attracting a larger number of quality buyers and being able to sell the business for top dollar. At Murphy Business, we guide business owners in overcoming these challenges so that the journey to the closing table is smoother and more successful. If you are considering buying or selling a business, please give us a call at 706-222-7710 for a confidential conversation.