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Do You Want to Eventually Sell Your Business? If so, this guide is going to provide you with the information to make selling your business easier & more profitable.

First off, do you know how much your business is worth?

    I am going to explain: Why this matters, How it is calculated, What you can benefit from this

Hello, Ben Shaw with Murphy Business Sales here with some information to help you and your business. A little backstory on myself. I have started several businesses over the years. I have personally gone through the mistakes and pains of running your own company firsthand. That is what brought me into the space of business brokering. Where I help small businesses with valuations and exit planning. Because if I would have known what I know now, I could have potentially sold my company for a decent price. Unfortunately, I ended up with a mostly unsellable business.

Back to your business. Do you know what your business is worth? Even a ballpark number? Because It is estimated that a majority of business owners have no idea or an inaccurate idea of what their business is worth.

Why does it matter? First off, a small business is typically an owner’s biggest asset. Would you keep working to put money into a 401K if you did not know what the current value is?

Now you are probably like most business owners and are not looking to sell in the next 12 months. That doesn’t mean you shouldn’t know what your business is worth, have a plan to increase that value, and have a basic understanding about the process of selling a business.

Finding out what your business is worth gives you a 10,000-foot view of your business. It forces you to take a step back and think about on working on the business instead of in the business. Also, it can help prepare you for any sudden life change.

How is business valued? Well, there are a few methods. We are going to look at very common method using Seller Discretionary Earnings. Also known as SDE. A simple summary of Seller’s Discretionary Earnings is how much justifiable benefit the owner takes in from the business. So, you combine pretax net income, owner’s salary, justifiable personal expenses, things like owners’ health insurance not necessarily playoff tickets, and adjust for interest and other accounting metrics (interest, depreciation, amortization) and you get SDE.

SDE = Pretax net income + Owner’s Salary + Justifiable Personal Expenses & (adjust for other accounting metrics)

SDE gives a prospective buyer a sense of the owner’s discretionary cash flow. This will give prospective buyers an idea of cash flow they can use at their discretion to cover their own compensation, debt service, return on equity, and any capital expenditures.

You can use SDE to get business value as well. You take that annual benefit of SDE and multiply it by an industry-specific multiple found by reviewing comparable business sales to get the business value.

“Average Annual SDE Value” (TIMES) “Industry-Specific Multiple” = Business Value

To make things easy we are going to use a rough industry average of 2.5 times multiple.

So if a business has an SDE of 200K and the multiple is 2.5X the business value is roughly $500,000.

$200,000 annual benefit to owner (TIMES) a 2.5 multiple = $500,000 Business Value

Now there is quite a bit more that goes into the business valuation. But this basic concept can help you and your business.

Knowing that 2.5x multiple is a great tool. If you can figure out a way to increase profit by $1 your business value can potentially increase by $2.50

I like to use this for reviewing those questionable expenses. The ones where you are not sure if it is worth the money but you keep spending the money anyway.

Instead of it being do I get $1000 back from this $1000, think about do I get $2500 back from this $1000? Because a wasteful expense of $1000 potentially costs you $2500. Or even worse, if you would have made the expense personally anyways, you are only saving about 30%, $300 in taxes, and potentially giving up $2,500 in value

That can be reversed for increased profit due to sales as well. An increase in sales leading to $1000 profit is a potential $2500 in increased value.

The understanding of how your business is valued helps give better information on how to improve your business.  We want to always be working on our business, and this is a great tool to help you.

If you want to learn more about this, schedule a call with me. There is no obligation, your call is an opportunity for a quick meet and greet. I would love to hear about your story. And I can go over any questions about a business valuation. Also, I can lay out what the path of selling your business looks like for you. Information that you can use now to make when you decide to sell much easier and more profitable.

Contact Ben Shaw for a free consultation

A checklist for someone looking to sell their business in the next few years:

• • Clean up your business bookkeeping. The more unorganized it is will prompt a potential buyer to ask more questions.
  • Review opportunities to cut costs, remember the 2.5x multiple.
  • Minimize expenses that would have been made personally anyway.
  • Build systems to make you, the owner, not involved in every aspect of the business. This will make the business more attractive to buyers.
  • Consider getting a business valuation to see what your business is worth now. This will help you create a plan to increase your company value.

What is needed for a business valuation

• • Last 3 years of business tax returns
  • Last 3 years of any family member who received a W-2 from the business
  • Last 3 years of P&L and Balance Sheet from Quickbooks (we have easy instructions)
  • Small owner questionnaire about the business and personal business expense