“How much is my company worth?” and “When is the right time to sell my company?” are two questions I get every year from my privately-held clients. These are both critical questions in the process to decide if you want to move forward with a sale of your company; questions that need to be asked and answered well in advance of that decision.
For most business owners, the business is the most significant asset in their investment portfolio, with the highest emotional attachment. Whether you started your business from the ground up or are part of a family business that has succeeded to you, there is likely a deep emotional attachment to your business, what it means to you, and your personal identity. In fact, it may be a significant part of who you are and what you have accomplished by bringing it to this point.
When it comes to understanding the value of your business, it is important to separate how much the business is worth to you and how much it is worth to prospective buyers. This difference can be significant, and bridging that gap early on will help save time and bring you to a realistic decision.
Using business valuation experts or learning about recent sales in your industry to determine a baseline value will help to speed up this process. If you do decide to move forward and sell your business for maximum value, there are three important steps that you need to take.
A buyer will pay you more for your business if it can operate successfully when you are no longer there. If all of the business, operations, customers, purchasing, and finances are tied to you and your abilities, then so is the value of your business. Prospective buyers want the business to be sustainable without depending solely on you. If the business needs you to run successfully, they might consider tying you to the company by making the purchase contingent upon you signing a long-term employment contract. This will lengthen the transition, but will transfer the risk of the purchase price and value of the company from the buyer to you.
Legally, you will want to ensure that you have all of your legal documents and contracts signed, ready, and available for a buyer. They will require access to all of these during their due diligence of your company, so you will want them organized and properly documented. Financially, you will want the earnings of the company and financial stability to be at its peak to maximize your sales price. This may take years of planning and cost-cutting measures to strengthen the financial statements of your company.
Buyers typically use a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) to value your business, and will look back at a few years of historical performance to determine the sustainability of those numbers. Being able to show buyers multiple years of growing EBITDA or consistent EBITDA is very important. They will also focus on working capital in the business, which typically is a formula of accounts receivable + inventory + prepaid expenses – accounts payable – accrued expenses. Although the value of your business is tied to a multiple of EBITDA, it assumes that this base line of working capital is in the business on the day of acquisition to be able to run it effectively. It is important to manage your working capital efficiently as you get ready for a sale.
Create forecasts to share with your prospective buyers and be able to articulate the vision of the future of the company to coincide with that plan. Buyers are not immune to making emotional decisions if they believe in the management group and their vision for the future.
If you have thoughts about selling your business it’s important to start asking these questions now. Begin planning and building your team of key management members and professional advisors (accounting, tax, legal, mergers and acquisitions) to help support you and guide you through the process.