Get The Most Value From Selling Your Business
You have worked hard to build up your business, investing more than just time and financial resources. Many business owners have invested emotional commitment, as well as placing demands on family and lifestyle to create and build their dream.
The first answer to all of these questions is: “take your time and allow at least 12 months to get your business ready for sale”. The second answer is: “make it absolutely crystal clear to your buyer where the value in your business is”.
- How do you plan to get the value you want from your business?
- When do you plan to sell your business?
- How do you get the right price?
What Determines The Sale Price:
There are two commonly used standard methods, among many others, for valuing a business include:
- Multiples of Earnings Method: [ ( Multiple ) * Past Average EBIT ] + Stock At Valuation + Goodwill
- DCF Method: Net Present Value(NPV) of Future Cash Flows + Net Assets
The Multiple is dependent on the nature of the business, profitability and security of future cash flows and other similar trade sales that have been made. For most small businesses this multiple is typically 3 – 5, although larger multiples can be achieved, based on demonstrated upside to the business.
- EBIT = Earnings Before Interest & Tax (Net Profit before tax with interest paid on debt added back)
- NPV Future Cash Flows = Sum of cash flows over next 3 – 5 years adjusted for the cost of capital
Goodwill is not how well you can negotiate the price up, but refer more to the certainty of future cash flows based on either secured contracts, loyalty of the customer base or new earnings opportunities that can be demonstrated.
The key features that determine the sale price of a business are:
So the key to getting a good sale price for your business is to make it clear to the buyer where they will get the return they require.
- Demonstrated profitability or past earnings
- Certainty and risk level of future cash flows
- Clarity of how the business operates and where the opportunities are
What Stops A Buyer Saying “YES”
Other than the right price some of the key things that stop the buyer from saying yes include:
Most buyers of a business will have ideas on how to increase sales or reduce costs, but it is uncertainty that will always make a buyer think twice. Uncertainty with regulation, industry trends or future cash flows will make a potential buyer look twice.
- Uncertainty in the industry
- Changes in regulation
- Uncertainty in future profitability or cash flows
- Complex operations or business systems
- Excessive debt within the business
- High dependence on owners / staff
However a frequent reason a potential buyer says “no” to a business is if the performance relies too heavily on owners or staff. In this case it is vital to show how the skills and knowledge can be transferred and how stable and secure the workforce is.
How Do You Get The Price You Want?
The best time to sell your business is when you can demonstrate the certainty of future cash flows, clarity within your business plans and a lack of reliance on key staff or yourself. This often takes time to develop – you don’t change your business overnight. Ideally you should allow yourself up to two years to prepare your business for sale, but this is often too far away for most business owners.
Typically it takes at least six months to demonstrate the hidden value you know is there and to transform the business into a value proposition for potential buyers. A twelve-month period is preferable in transforming and restructuring the business so that the potential buyer has a clear record of improvement to work from. In this case your financial statements will clearly reflect an improving position in earnings and hence increase the price you will get for your business.
Key steps involved in getting the price you want for your business includes:
The last point to make is that often the best buyer for your business is one that has worked with you for some time and understands the business and the risks involved. If you allow enough time, you can develop strategic linkages with other businesses. These businesses will often provide the best sale price, as they understand where the value is and may offer significant synergies with their own business.
- Develop a clear succession plan showing what skills are critical to the business and how these are being transferred across staff in the business. It should also outline how the skills of the owner will be transferred during or after the sale of the business.
- Increase cash flows in the business to boost earnings and target core markets to increase sales
- Clean up the balance sheet to show how assets and debts are being managed effectively
- Demonstrate clearly where the profit in the business is generated and ensure this is clear in P & L statements
- Explore strategic linkages with other businesses in your supply chain
- Develop clear action plans that show where the improvement opportunities are and what actions must be implemented to take advantage of the opportunities
Getting the most from your business takes time and requires a strategic look at the business, understanding how the business makes profit and making that clear to potential buyers. It is more than just window dressing – it needs to be real change in the business performance – it is performance that justifies the price the buyer will pay.
Buying a business is rarely an impulse or “on the spot” decision. Getting a quick sale usually means giving up value that could be in your bank account. The key message in this is to BE PREPARED!
The first step is to understand what the value of your business is now and where the profits are generated. Knowing this allows you to develop plans to increase the value and to structure the business to make the value crystal clear.
It is more than just window dressing – it needs to be real change in the business performance – it is performance that justifies the price the buyer will pay.
Executed properly, this can take up to two years before you are really ready to sell. But the increase in value can be many times over if done correctly. And that could mean having enough funds to buy into your next business or retire in comfort, rather than scratching around for your next job.
Maxell Consulting has helped many businesses identify the value in their business and empower the owners to develop plans to crystallise that value.
We offer a free assessment of your situation and review what potential value exists within your business.