We work with business owners $2m+ in annual revenue to exit for the best price and terms. If you are entertaining an exit, start by requesting a complimentary valuation. If your business isn’t a fit for us, we’d be happy to introduce you to one of our colleagues who has the bandwidth to serve you.
Step 1: Determine the Value of Your Business
Getting a business valuation is the most important step you can take toward a successful sale. It’s not a straightforward process, and we recommend enlisting a business broker or valuation expert to ensure you get a fair market value. Keep in mind that a third-party valuation will bring credibility to your asking price.
A qualified valuation professional can review a business and its competitive environment. The appraiser will take into account everything from inventories to sales, debts, and other business assets to identify opportunities and set a realistic asking price. It’s important to note that annual cash flow alone will not satisfy savvy business buyers; you may need to present prospective buyers with a plan on how the business can grow and thrive without you at the helm.
Business Valuations in Today’s Economy
The whole business valuation landscape has changed in the past few years as global economies have shifted. The business valuation multiples themselves have shifted. We now see most small businesses (under $1m in annual profit) selling for anywhere from 2-4x their annual profit. Some larger companies ($1m-$5m in profit) will sell for higher multiples, typically in the 5-9x range. Several factors are at play, such as market demand, how desirable your industry is, how much of your revenue is recurring, how differentiated your business is, and what margin profile your business has.
It’s important to note that cash flow alone will not satisfy a buyer. You may need to present prospective buyers with a plan for how the business can grow and thrive without you.
Thinking About Selling?
If you are entertaining selling your company, feel free to request a consultation with one of our business brokers or M&A specialists to learn about our process and why we believe it is the best in the industry.
Factors That Impact Business Valuation
A business valuation is based on both the strength of your financial statements and non-financial data, and a buyer may value some forms of information more than other metrics. A seller also may consider some measurements to be more important than others. A few of the key business valuation criteria are:
How owner reliant your business is
Will the small business administration finance a buyer to buy your company? Interested buyers are much more likely to purchase a business if they can get the favorable lending terms provided by the SBA.
If you have a quality team and your business processes are in order. Making sure your business is not too owner reliant and having a strong leadership team in place is imperative.
Going through the business valuation process involves subjectivity to a degree, so having an expert M&A advisor who has sold companies in the same industry before is imperative.
To learn more about the many tools used to assess the value of a business and why buyers and sellers consider this data relevant to a sale.
Step 2: Get Your Financial Statements in Order
In today’s economic climate, buyers seek businesses that are both profitable and have long-term viability. Savvy buyers will consider the complete picture of the financial health of your business, so clean books are key.
Work With an Accountant
Your job is to get your business financials, records, tax returns, inventory, and all other financial records, business tax returns, and information in pristine order before taking your company to market.
We recommend you go with an accountant or business consultant to review your financial statements and tax returns dating back three to five years. Create a list of inventories and equipment you want to sell with the business, including intellectual property and intangible assets.
Make sure that all documents are organized and presented in a useful way to the buyers. Be sure to include all crucial information, as everything will come out in due diligence. To successfully see your business cross the finish line, it’s imperative to be as transparent as possible so that buyers know what they are getting.
If you are approaching a exit and want to learn more about the process and valuation, we have put together a number of articles on selling companies in various industries. Have a look at our blog page to see more.
Step 3: Work to Increase Your Business’s Profitability
As you focus on a sale, you must work on increasing the value of your business at the same time. Value isn’t solely linked to an increase in revenue or sales – it’s all about your margins and bottom line.
A business experiencing a decline in value will ultimately detract from the final sale price. Most buyers will look at sales and gross profit records to determine the viability of a business. They want companies with a 30% year-over-year sales growth, which means they want to acquire thriving enterprises – not surviving.
Buyers will inquire about the contracts and employee agreements you have in place and whether those contracts are transferable. They will evaluate the future potential of your revenue streams and pinpoint recurring revenue opportunities that indicate ongoing sales, sometimes years in the future. They will also look at the number of customers you have, your income streams, and your management team as pillars of the value of your business.
How to Increase the Value of Your Business Pre-sale
Your goal is to maximize the price you receive for your business, and you can take proactive steps to increase your company’s value between now and sale time. Increasing the value of a business generates more profits while you remain the owner and helps to justify a higher sale price.
Here are some steps you can take to increase company value:
Brand awareness: Increasing brand awareness increases the value of your business., as more consumers become your potential customers. It also helps you differentiate from your competition, creating a defensible moat to ward off competitive threats.
Build your stable customer base: Make improvements to increase the dollar amount of sales generated from repeat business. A stable customer base that continues to buy your products over time can increase company value.
Close any unprofitable divisions: Make the hard choice to close a company division or product line down that compromises your bottom line.
Improve pricing and cost allocation: Each month, compare your actual sales prices and costs to your budget and investigate any differences (also called variances). You may find ways to increase your prices and reduce costs.
Wise Investments: Investing in technology and worker training can have a positive long-term impact on your business. Both types of investments can help you operate more productively, increasing profits.
Consider implementing all of these ideas to lower costs, work more productively, and increase your profits. You’ll benefit financially, making your business more attractive to a potential buyer.
Step 6: Qualify Potential Buyers
Most new business acquisitions are partly funded by third-party lenders. One of the reasons why transactions fall apart is that buyers fail to secure loans after entering into an agreement with the sellers, making it imperative to identify buyers and pre-qualify potential buyers before you engage in a purchase agreement with them.
Vetting Prospective Buyers
You need to consider many things before entering into a purchase agreement with a potential buyer, including asking the potential buyer the following questions.
Has the buyer secured funding, or do they have the necessary capital? Ask potential buyers to submit financial statements showing they have enough resources and means to fund the down payment, including the first six months of working capital to fund operations.
Can the buyer run the business, and do they have business experience? Lack of experience shouldn’t be a disqualifier. However, most qualified buyers are experts in the industry.
Does the buyer have a reasonable timeframe? Ask prospective buyers whether they are ready to purchase immediately or if they are still months away from making an offer.
Other Factors to Consider When Vetting Potential Buyers
From financing structures to negotiation strategies, here are some other things to keep in mind as you court the right buyer for your business:
Pre-qualified financing for a buyer: Does a potential buyer have the financial means to buy your business? If a buyer is interested, find out if they have financing in place, either from a lender or through investors.
Equity versus asset purchase: With an equity purchase, the buyer purchases your entire business’s equity (assets minus the liabilities). Conversely, an asset purchase means the buyer only buys certain assets – not necessarily the entire business. Consult with your accountant and attorney on each purchase method’s legal and tax implications.
Earnouts: As a seller, when will you be paid? Will you receive one large check when the sale is closed, or will you be paid through earnouts over time? In many cases, a seller stays with the business for a period of time and can receive additional compensation, depending on the firm’s financial performance.
Negotiation strategies: You only get one chance to negotiate a sale with a particular buyer properly, so work with your broker and other experts to understand the negotiation strategy. For example, become familiar with the term Zone of Possible Agreement (ZOPA), which is the price range within which the two parties may come to an agreement. Another important term is the Best Alternative to Negotiated Agreement (BATNA).
As you can see, the whole business sales process can be time-consuming and demanding for a seller, and you have to balance the demands of running your small business with the process of finding the right buyer. The right team can, in large ways, help to minimize risk and maximize your business sale in price and terms.
Your business is most likely one of your most valuable assets, and building a successful company took years of time and effort. Whether the goal is to sell today or in five years, by starting the exit strategy early and partnering with a trusted business broker, you are heading down the right path toward successfully selling your business.
Don’t let the complex and time-consuming selling process stop you from following these well-established steps to help you land the right deal for yourself, key employees, and your business. This comprehensive guide will help you make an informed decision – and maximize business value and the price you receive for your business quickly after the sale while building a more robust business along the way.