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You’re starting to think about selling your business. Your neighbor’s cousin just sold her company and got eight times EBITDA (earnings before interest, tax, depreciation and amortization) for the sales price. “If eight times EBITDA is the going rate for business sales,” you think to yourself, “count me in!”
Don’t fall into the “rules of thumb” trap
While your neighbor’s cousin may have sold her business based on a “rule of thumb” multiplier, you should not. Each business has its own challenges, and a multiplier applied to someone else’s business may not be appropriate for yours. Plus, the actual value of your business is dependent on a number of factors, not just a multiple of an easily-derived number. Potential buyers will want to look at your cash flow streams for a certain number of years, your operations, industry-specific and broad market factors, and more.
If you rely on anecdotal “rules of thumb” to derive a sales price for your business you’re likely to either leave money on the table or price yourself right out of the market. Hiring an investment bank or business broker to help you with the valuation can be a very good idea.
Don’t wait until the last minute to prepare to exit
Regardless of how you plan to value your business, it will be worth more if you plan ahead. For example, what can you do now to…
• Increase earnings – When you provide potential buyers with historical data, you’ll want the sales and expenses reflected in that data to look good.
Keep in mind that when talking about maximizing profitability, most people generally think that increasing sales volume is the answer. This is not always the case. Sometimes a better approach is to shrink the company. A smaller company can narrow its focus to just providing the services or products that can be sold at the highest gross margins.
• Get your operations in top shape – This includes having strong financial controls and appropriate policies and procedures in place, strengthening your customer base, and more.
• Make yourself less important – You need to have a team that can carry on the business when you’re no longer there. If you are the sole face of the company, few people will want to buy it.
• Retain key employees – A deferred compensation plan can encourage key employees to stick around after a sale.
Need help with any of this? Give me a call! As your part-time CFO I’m here for you.