Who Can I Hire to Help Me Sell My Business?
After you’ve taken the time to think about your priorities when selling your business, it’s time to start aligning yourself with people who can add value during the process. There are a number of people who want to help you sell your business and get paid to do so. But who are the essential parties and what do they offer?
If you are a business with over $5,000,000 of revenue you are likely large enough and sophisticated enough to benefit from outside advisors instead of trying to do it all yourself. Engaging professional advisors at this early stage of the process can help prevent mistakes and provide valuable guidance as you move through this process.
The value and guidance you get from good advisors will be well worth the investment. Quite often I see owners delay engaging advisors because of the time and money it takes, but I am confident that involving them early will save you time, money, stress and regrets later in the process.
The Advisors You Should Hire to Help You Sell Your Business
It is important that you take the time to identify good advisors for your specific firm and situation. We recommend interviewing at least 3 professionals in each category before making a decision on who to hire.
Even if you already work with an attorney or an accountant, it will be beneficial to hear perspective from others. At the worst, you invest a little time to ensure you made the best decision, and you may end up discovering someone who will be much more beneficial to you throughout the process.
Seek out advisors that have specific experience working with both firms of your size and within your industry. Different size companies and different industries have unique attributes that some may not be as familiar with. Working with someone familiar with multiple aspects of your business can help ensure you consider all relevant factors and don’t overlook key areas.
Who Can Help Sell My Business?
The two most important advisors to engage in any business sale are an attorney and an accounting professional. Whether or not you involve an M&A advisor, business broker or investment bank is ultimately up to you — but having a good attorney and accountant is non-negotiable. They’re both an absolute must.
What an Attorney Helps With — and What to Look For
Hiring a good attorney is essential for selling a business. When I worked as a buyer, I highly encouraged the seller to engage his own legal counsel as soon as possible, and often required it as a prerequisite to us proceeding further.
This is because there are a variety of decisions, issues and documents that will come up throughout the process and, if the seller doesn’t have his own legal counsel, key items may get overlooked and the process may get delayed.
Business attorneys often specialize in certain areas, but most can provide professional guidance in a number of relevant areas including:
| Preparation | Deciding on whether to do a stock sale or asset sale and what implications that may have for you now and in the future.
Ensuring organizational documents are up to date and fill in any missing information. As a seller, you "represent" they are complete and up to date as part of the sale. |
| Initial Structure & Negotiations | Reading through offers and legal documents presented from buyers to ensure appropriate language.
Editing and approving language in the term sheet. Depending on the attorney, some may be willing to help structure and negotiate some of the terms of the sale. Documenting the agreed upon terms of the sale.Inserting adequate protections when considering any form of seller financing. |
| Business Specific Items | Dealing with intellectual property and the potential transfer of these items.
Drafting, reviewing or approving employment agreements, non-compete agreements, promissory notes and customer contract details. |
| Closing & Beyond | Editing and approving language in the purchase agreement.
Addressing the nature of representations and warranties (often referred to as "Reps and Warranties"). Ensuring final documents get signed and the appropriate money gets exchanged on time. |
When interviewing business attorneys be sure to understand which services they provide and how much experience they have performing them with businesses of your size and in your industry.
What an Accountant Helps With — and What to Look For
Depending on the size of your firm, you may already have a sufficient accounting expert on staff. Either way you need to be sure the accounting professional you rely on has sufficient expertise to assist throughout the sale process.
Some key areas that accountants serve in the sale process are:
| Prepare clean and accurate financial statements | As we cover more in step 4, the sale process will require that you share detailed financial statements with various parties, including the valuation professional and potential buyers, throughout the process.
Having professionally prepared financial statements, along with documented accounting systems and controls, also helps your company seem more professional and well run, which can enhance a buyer’s image and potentially impact offer price. Note: Many buyers and lenders will require “audited” or at least “reviewed” financial statements which will require the use of an outside accountant. |
| Prepare and validate other financial information requests | A variety of requests for financial information will come up during the process including during due diligence.
These may include requests such as revenue recognition policies that need to be in compliance with GAAP, accounts receivable aging schedule, adjustments to “normalized” earnings, list of capital expenditures and details of working capital. A common request from a potential buyer is that revenue and profitability be broken down by customer, location, product and/or service. Ensuring these numbers are accurate can have a meaningful impact on final price. |
| Determine accurate purchase price allocation | This ensures the most effective tax treatment when selling a business. Purchase price allocation includes determining the value of tangible and intangible assets, including any write-ups, on the balance sheet. The difference between purchase price and the value of assets is allocated to goodwill.
There may be different tax treatments resulting from your purchase price allocation, so ensuring this is correct can greatly impact the amount of money you walk away with.In addition, the calculations for purchase price can get complicated if the structure of your deal contains an earn-out or other similar forms of consideration. |
| Assist in preparing future financial projections | It’s often helpful and necessary to have an accounting professional able to assist the buyer and any lenders in their evaluation of the company.
Since you likely have the most knowledge about your business and how it may perform in the future, buyers will often ask for projected financials. This may include various scenarios given certain different assumptions. There are many considerations that go into accurately projecting financial numbers and a good accountant can provide guidance to ensure you are accurately communicating expected performance. |
Who Will Sell My Business?
Some owners may decide to sell their business on their own and others will prefer to hire an expert. The right answer for you may likely depend on the size of your business and the time and expertise you have to prepare the information and handle all of the inquiries and negotiations. My opinion is likely biased, but I strongly believe a good M&A Advisor can add significant value above and beyond the cost of using one.
Selling Your Business by Yourself
If your business has fairly simple operations and revenue below $500,000 or so, you may consider selling it yourself. If you choose this option there are online resources that will allow you to post your business on their site for a fee and will forward interested parties to you. The cost of this service is around $150 per year and may offer other options for an additional cost.
With this method, you are hoping that the right buyer comes to the site, at the right time (when your business is posted) and is open to working a fair and straight forward deal with you. You will be the person that puts together all of the marketing materials, and once you have the listing up and start getting interest from outside parties you will be the one that has to answer all the calls, respond to the emails, coordinate NDAs, send out information and move any qualified buyers through the process.
If you haven’t been through a sale before you will quickly learn that there are typically a lot of parties that claim to have initial interest, but either they don’t really have the money to buy your business, or don’t have the genuine interest to actually move through the process and make an offer. These non-qualified and non-serious buyers will typically be the majority and end up getting you nowhere. And that is in addition to those who claim to have interest in order to get information on your business so they can use it to help themselves in one way or another.
In my opinion, smaller businesses may choose to go to market themselves and get away with this, but for businesses over $5MM revenue there is enough money on the table, complexity in the business and sophistication among buyers that working with an M&A Advisor can provide a lot of value.
Note: It’s extremely important to ensure the business continues to operate successfully during the sale process. If you are still involved in the operations of the business, any time you spend trying to handle the sale yourself is time taken away from the business.
Who Can Sell My Business For Me?
What type of expert you hire will largely depend on the size and sophistication of your business. The types of parties that you may choose to work will fall into the category of Business Broker, M&A Advisor and Investment Bank.
Types of Intermediaries
All of these parties will perform services to help you prepare and sell your business, but the difference is in the types of service you receive, the level of expertise they bring and the amount of money they charge you. The cost of selling your business can largely depend on what type of professional you hire and the level of sophistication they bring.
What Do Investment Banks Do?
Investment banks tend to offer a broader range of services and are more involved in all stages of the process through various members of their team. Some of these services may include public offerings or services only applicable to public companies.
They will typically put together a longer and more detailed book, help manage the diligence process and be more involved with targeting and negotiating with buyers. Outreach is very proactive to qualified parties and the process is very organized and planned out.
An investment bank often will use its resources to gather a pool of interested parties, then run an auction type format where buyers submit offers in an effort to create additional competition. As indicated earlier, not all offers are the same and the value offered can come in more forms than just total price, so knowing what is most important to you will help here.
Investment banks will often create a number of valuation model scenarios for you, indicating a range of possible valuations under different circumstances. Also, if any external financing is needed, the investment bank can handle raising or facilitating additional capital from other sources. Due to these additional services and more complex structures, the regulatory bodies require investment banks to formally register with FINRA and carry certain licenses.
How Investment Banks Make Money
Investment Banks typically have minimum fee requirements which is why they usually work with larger companies, more complicated transactions and public companies in order for their fee level to make sense.
It is common for an investment bank to charge a retainer, paid monthly or in a lump sum, at the beginning of the engagement and a success fee that is paid as a percentage of final price at closing. This larger fee is partially because they have to pay a lot more people who are involved in the transaction. In addition, the more sophisticated transactions require more tools, research, and data in order to complete the process.
The amount charged by investment banks will often depend on the complexity of the transaction, but even a smaller investment banking deal would likely be charged a $50,000 retainer plus 5% of the final sales price. The retainer also helps offset costs during the process and separate serious sellers from those just looking to see how much their firm may be worth.
What Do M&A Advisors Do?
M&A advisors & IBs are similar in their offerings, though there are certainly some differences. M&A advisors bridge the gap between the smaller businesses that are sold by business brokers and medium to larger size businesses that are clearly led by large investment banks.
Similar to investment banks, good M&A advisors maintain relationships with a variety of firms, who are actively seeking opportunities in the space. Rarely do M&A advisors simply place ads on a website. Their marketing process involves proactive, targeted outreach to multiple qualified buyers in order to generate competition and drive a higher price. M&A advisors can help you understand valuation and structure expectations within your industry in the current market environment.
M&A advisors and investment bankers typically sell companies to other companies, or institutional investors like private equity funds and family offices. The transactions involved at this size and stage of the market tend to be somewhat complex and require a level of sophistication and understanding in corporate finance not commonly found with brokers serving smaller companies.
Depending on the transaction structure, some lower middle market transactions do not require the advisor to be licensed under the securities laws. You will find that most M&A advisors are not licensed and are not required to be.
How Do M&A Advisors Get Paid?
Although the typical fee charged by M&A advisors can align with either the investment banking model or the business broker model, we tend to see the success fees fall in the 3% -7% range with some charging a reasonable retainer ($3,000 - $10,000) to ensure the parties are serious sellers and will work towards a speedy close.
What Do Business Brokers Do?
Business Brokers primarily sell smaller companies that are commonly income replacement for the owner. These types of businesses are often sold to an individual buyer and therefore are valued on a basis of Seller’s Discretionary Earnings (“SDE”) rather than using EBITDA.
The level of marketing is typically simpler in nature and tends to involve more one-off negotiations with individual buyers. Business brokers may advertise to prospective buyers on your behalf but, compared to investment banks and M&A Advisors, this is minimal and relies more on incoming interest vs outgoing connections. Often times these efforts are more of a passive process where the broker lists their deals on a website and reactively respond to inquiries.
If external financing is needed, the buyer is responsible for making his own arrangements.
What Are Typical Business Broker Fees?
Business brokers typically function like real estate brokers and get paid only a success fee, so if you don’t complete a sale there is no charge. Because of this, they may be working with a number of businesses at the same time since they can’t be sure that any one business will sell.
It’s common to see business brokers charge 8% - 10% of the final sale price as a success fee. The reason this amount seems high as a percentage is because, due to the smaller size of companies they work with, they need to charge a higher percentage in order to hit an absolute dollar amount that makes the effort worth their time.
For example, if your business is sells for $400,000, then a broker would need 10% in order to make $40,000. And although $40,000 may seem like a lot of money, this amount often covers numerous months, or even years, of work along with various costs throughout the process.
Other common pricing methods for business brokers includes the Lehman Formula, the Double Lehman, the Double Percentage Lehman (“Modern Lehman”) or some modified variation. The reason for the sliding scale is so the broker is ensured to get sufficient compensation for their efforts, but not to charge the highest percentage on the entire amount.
Using an intermediary helps remove emotion and provide objectivity into the process. They allow you to focus on your business, to keep it running at a high level until final sale, the importance of which is discussed in chapter 6. They can help create marketing materials, handle communication with interested parties and help you understand which offers are fair given the current market environment.
In addition, intermediaries can help protect the identity of the seller and ensure that all information is kept confidential at all times. Finally, even if they aren’t directly involved with negotiations, intermediaries can help create a level of competitiveness among buyers without impacting your relationship with any of the parties.
Selling a business can be difficult, time-consuming, and frustrating. Before you take the plunge, prepare yourself by reading our 70+ page ebook, The Ultimate Guide on Selling Your Business. Still have questions about selling your business? You can contact us here.
What Should You Consider When Selling Your Business?
Selling your business is not easy. It will involve a lot of hard work, take a considerable amount of time, and require reaching out to a lot of people for help. Before you get too far down the path, you need to spend time thinking about what is really most important to YOU.
What are the specific pieces that will ensure you find the right fit and have no regrets in the future? Taking time to think through the following decisions early on will help you keep perspective, and guide you as you move through the process to sell your business.
Why Do You Want to Sell Your Business?
Make sure to document your true reason for selling.
- Is it because you have the opportunity to move on to something else and would no longer have time for this business?
- Do you wish to spend more time with your family and friends or just be out of the office with time for yourself?
- Have you been approached by a buyer, with an offer that will help you and your company make large strides it couldn’t achieve on its own?
- Is it primarily about realizing financial benefits that you’ve earned for getting the business to this point and want to be able to enjoy?
There is no answer that is right for everyone, but depending on your reason for selling, there may be large implications for what type of buyers you want to seek and what your role will be post-sale. Keeping these reasons in mind when evaluating buyers will help you keep perspective and make the best decision for you and your business.
Your Role After Selling Your Business
Some owners have a strong preference regarding their future role, or lack thereof, so now is the time to think about what your preferences are. Determine the perfect scenario, but also consider what you would and would not be willing to do if asked by a buyer.
Exiting the Business Post-Sale
If your desire is to exit the business post sale, then you will want to be sure that the transaction you enter into is with a party and structure that allows you to leave the business in your desired time frame. This also means that either the buyer, someone else from your team, or someone the buyer brings in, will likely have to take over your role and duties.
If someone needs to take over your role you will likely be asked to provide some level of training, or assist with transition, for a period of time sufficient for that person to get up to speed without having a negative impact on the business.
In addition, if you have key responsibilities and relationships, a buyer may want to tie up a portion of the purchase price in some form of contingent payment to ensure the business can perform at a similar pace without you involved. Without that, the business may not be worth as much to a buyer.
Likewise, it’s also important to remember that there’s a lot of work involved in prepping your business for sale — and doing what you can to increase its value to interested buyers.
Remaining with the Business Post-Sale
If your intention is to remain with the firm post-sale, whether that be in the same role or a different role, that needs to be communicated up front to buyers and factored into the discussions. Your role and compensation desires will not only impact the price, but also the type of buyer that may have an interest in the business.
In this scenario, you will need to think through how decisions will be made once a new buyer is involved in the business and discuss those thoughts with potential buyers. It is often hard for previous owners to transition out of the lead role after spending so much time leading day to day operations.
We often see owners who remain involved in the business want to continue making key decisions. But if you aren’t the majority owner anymore, you might have to start taking orders instead of giving them.
It is important you think through your role post-sale as well as any compensation you desire. You may have great value remaining with the business, and a strong desire to do so, but buyers will want to have these discussions up front to help determine their interest and structure the deal.
Other Considerations When Selling a Business
Over the years that I’ve been working with business owners, I find there are many motivations that influence the decision of who they sell to. Many of them have multiple motivations but prioritize them much differently.
Here are some of the more common priorities that have surfaced. As you read through them, consider which, if any, may impact your decision enough to accept a lower price from a potential buyer. Then rank them in order of importance for you. This will be helpful for you to refer back to later in the process.
Money
This isn’t just about getting the highest price — it also relates to whether or not you are willing to accept a portion of the purchase price in some form of contingent payment. Doing so may result in a higher total price, but may also delay, and potentially risk you ever getting that portion of money.
Some owners are adamant that they want 100% of the cash at closing. But they need to realize, for that to happen, it will likely result in a lower total price. (Want to learn more? This is covered in detail in our Ultimate Guide to Selling a Business).
Employees
A number of owners place strong importance on the future of their employees when selling a business. Particularly, they want to ensure they will remain employed in a good work environment under new ownership. After all, these are the people who interact with customers, work behind the scenes and have helped shape the culture of the company.
Culture
Some owners and leaders intentionally focused on creating a specific culture at their firm that they and others enjoy and also helps them attract and retain employees. For others it happens unintentionally and was strongly influenced by the example you set as the leader, and further developed by the types of people who were hired over the years.
Culture could have been formed by your strong or weak work ethic, positive or negative attitude, open communication and social efforts, birthday and holiday celebrations, team building events, casual Fridays, or even as simple as noticeably having a smile on your face when walking through the office. Some firms have been recognized as a “Top Place to Work” because of the culture that’s been created.
For owners that realize they have a strong and beneficial culture within their firm, I often see them have a strong desire to ensure that any new ownership will align with this culture, even potentially enhance it, so that it can remain a strength for the company in the future.
Clients & Customers
I’ve heard a number of owners talk about how important their clients are to them and how the future service they receive is vitally important to them. Some have shared how the business wouldn’t have even been able to make it through the first year without a few early customers who gave them a chance and put their trust in them early on.
Company Name
Some companies have been passed down for generations, or have other deep reasons why the name of the company is part of the legacy that is so important for them to ensure lives on. Often times the name represents more than just letters on the sign, it’s a name, a meaning, a brand, or image that has deep meaning to an owner.
Different types of buyers may have different plans for the future of your business or even their own business that your company will become a part of, resulting in the company name dying completely. Others may value the name and want it to live on, whether they already have their own company or not. If the name has intrinsic value for you, it may be important for you to understand what the buyer’s intentions are for future use of the name.
Social Impact
I continue to be impressed by the larger meaning that some owners communicate their business has for them based on the impact that it has on society or other people.
Some owners had the knowledge and passion to create something with positive and meaningful impact for the greater good of humanity, or a specific portion of the population. To deviate from this purpose would eliminate the entire reason for starting the business.
If you were to sell to a buyer who didn’t share that same passion, or worse, didn’t even want to continue pursuit of that original mission, it may never reach the level of impact that you desired which may leave you with major regret.
Many of the considerations mentioned above, and many others not mentioned, may come from a buyer who is willing to pay a higher price, but may not accommodate your preferences. How much money is that worth to you? Or will that completely prevent you from moving forward with that buyer?
There is no one right answer, but having thought about this ahead of time with a clear mind (not under stress of the process and intense negotiations) will help guide you through all of the external noise and stress when it comes time to evaluate offers and decide how to move forward.
I encourage you to take some time with this, discuss it with your spouse, family, friends, and any business partners or associates you might trust. They can oftentimes help put this in perspective because they know you well and can provide an unbiased opinion. It will also help ensure you have no regrets after all is said and done because you were well prepared. It may mean that you accepted a slightly lower overall price but will help ensure you are completely comfortable that you made the right decision for years down the road.
Once you’ve taken the necessary time to think about the answers, write them down, and refer back to them throughout the process. It’s quite possible that you learn some things throughout the process which alter your opinion — and that’s ok — but remember the thought you put into these answers and why you chose them.
Selling a business can be difficult, time-consuming, and frustrating. Before you take the plunge, prepare yourself by reading our 70+ page ebook, The Ultimate Guide on Selling Your Business. Still have questions about selling your business? You can contact us here.
What to Do After Deciding to Sell Your Business
You’ve prepared your financials and have a professional valuation underway. You know you’re going to sell your business — it’s just a matter of when.
So… what now? What should you be doing while waiting for the next step of the process to begin?
Throughout the process of selling a business you want to make sure that sales and profits remain strong, or at least steady. But it’s also a time when you should be examining all areas of the business to ensure they are all operating as effectively as possible. These efforts will help ensure your business sells for maximum price.
Once you “go to market” with your business (in the next step) your next 3-6 months will be busy engaging with potential buyers and responding to additional data requests. This is why we list this step just prior to going to market.
Take this time to revisit each segment of the business to ensure it is functioning as it should and spend any time needed making necessary adjustments and improvements.
Keep the Machine Running at Peak Performance
Engaging in the process to sell your business will likely take a lot of your time and focus. Even if your business is perfect in every area, you need to spend time ensuring that it stays that way. Far too many times I’ve seen owners get caught up in the sale process and allow certain areas of the business to lose traction or even fall apart completely.
As an example, we recently worked with an owner selling a business who was doing a great job organizing all of their data and being responsive to diligence requests because he wanted to ensure the process moved along as quickly as possible. Meanwhile, the extra focus that was put on these tasks resulted in them falling behind in their customer billings. This fact wasn’t noticed until the buyer was in diligence and had ordered a Quality of Earnings (Q of E) which showed that many of their largest clients had large amounts becoming more and more overdue.
This is a major red flag to a buyer if the largest clients are becoming unable to pay or deciding not to pay. Luckily, in this situation the customers who were late had all been happy customers for years and a simple call to each of them to explain that they had missed sending out some of the invoices resulted in them all catching up over the next few weeks.
We’ve seen other businesses fall behind in their sales process resulting in a lower number of new customers. This seemed to imply that maybe business was having trouble winning customers or that growth may be slowing. Others have allowed marketing efforts to slow, processes to derail or innovation to lag. While there are many other examples, each of these raise a flag for a potential buyer and may negatively impact how much your business is worth.
Improve Areas That Can Enhance Value to a Buyer
As much as we may think otherwise, most of our businesses have some areas that could be enhanced in the eyes of a buyer. So, during this stage of the process to sell your business, you should also be spending time determining which areas of your business are the lowest hanging fruit for improvement and which could increase business valuation the most.
In addition to reviewing the professional valuation, a good M&A advisor or business consultant will be able to assess the business and help you identify which areas are most important, which just need a little work and which are larger projects. They can then help you prioritize those areas and put a plan in place to address them.
Similar to a real estate agent suggesting a few light paint touchups, there may be some areas of the business which would require minimal effort to address and can be taken care of rather quickly. These should be addressed in order of priority. Others may be larger projects, like replacing all the carpet on the main level or even remodeling the kitchen, that will take more time.
As we continuously preach, the process to selling a business should start many months or even years prior to when you actually want to go to market for exactly these reasons. If there are larger projects that could have serious impacts on value, the additional time spent to put them in motion and prove their success will be well worth the effort.
Key Areas to Examine to Increase Your Businesses Value
The following are some key areas that you should examine at this stage of selling your business. Whether you feel your company is strong or weak in these areas, it’s worth it to examine them to ensure your business is showing at its best as buyers perform their diligence.
Are the Right People in the Right Roles?
When we consult with a company regarding its people, we often start by determining if they have the right people in the right roles.
This process starts by identifying how the business is organized and what roles are accountable for the major functions within the company (finance, sales & marketing, operations, etc.). This is different than a simple organizational chart, which simply shows who reports to who, and focuses more on who is accountable for each of the major functions that drive the business.
Once you have that structure laid out you can then start to assess if you have the right people in each role to be accountable for that function. Defining the roles to be accountable for each function will guide your decisions for hiring, replacing and promoting those in that role.
Ensuring you have the right people in the right roles means that they fully understand what that role entails, have the desire to work in that role and have the skills and experience necessary to be successful there.
Now if you’ve started the process to sell your business early enough before you go to market, then this kind of analysis can be thoroughly analyzed and corrective measures can be taken to ensure you get the right pieces in place.
But, if you are going to market soon, you may not have enough time to go too in depth here and you may not want to disrupt the organization to that degree. If this is the case, look for the most obvious mis-matches.
Is there someone who should clearly be promoted, let go or simply moved to a more appropriate area? If so, these small, proactive improvements may help your company when buyers are assessing during diligence.
Are Your Employees Happy?
Before selling your business, it is also important to ensure all of the employee contracts are up to date and any necessary non-compete agreements are in place.
When a buyer considers purchasing a business, he wants to know that the key people are happy, will remain with the firm and have compensation expectations that are in line with what is being communicated to the buyer.
What Does Your Customer Concentration Look Like?
Customer concentration is a major factor in a buyer’s mind and can often impact price when selling a business and the structure of that offer.
As a buyer, I am willing to pay a higher overall price and a larger portion up front for a business where no customer makes up more than 5% of revenue, than I am for a business where the top 3 customers make up 65% of the revenue. The latter business presents more risk to a buyer because if just one of those customers leaves, the business would experience a major decline in financial results.
If your business has a large amount of customer concentration, expect a buyer to tie a larger portion of the purchase price to the performance and/or retention of those customers over the next 2-3 years. If you are able to make efforts to diversify that concentrated revenue it will not only show that there is less risk in your business, but new customers will also show that you can grow outside of those large customers.
What Customer Contracts Are in Place?
When preparing your business for sale it is a great time to review customer contracts to make sure they are all signed, accurate and up to date, especially any larger clients as discussed above. We have numerous stories about buyers asking for copies of customer contracts during diligence only to find out that some have expired, were never signed or are still using an old version that doesn’t align with current practices.
Even contracts that are correct may be coming up for renewal soon. Before going to market to sell your business it’s a great time circle back with those customers to ask how they are liking your product or service and potentially see if you can get them to renew now. If they are happy with your services, they may even be willing to renew new for a longer period of time, and the longer the customer contracts are the more that increases business valuation in the eyes of a buyer.
In certain situations, it may even be worth it to offer customers a slight discount in order to entice them to sign a longer contact. A good consultant can help you weigh the value of extending a discount in return for signing a longer contract and its potential impact on valuation.
Do You Have Weak Customers You Can Strengthen?
Customers that are a hassle, not profitable or falling behind in payments should be discussed amongst the team. It is quite often worth the time to reach out to these customers simply to understand how their business has been going and how they plan to engage with you moving forward.
Some businesses are just small and won’t ever be able to become a larger client. But others may be deciding between you and your competitors, in which a simple call to understand how you can work better together may help sway that decision. We’ve also seen some customers holding back because they had a bad experience or aren’t quite getting everything they need from you. Again, a quick call to understand those issues could have a meaningful impact to the business moving forward.
If you have customers who are behind in payments, now is a great time to reach out and address those issues. It may be that the delay was caused by something on your side, in which you can correct it and make sure it’s addressed for the future.
Or it may have resulted from something on the client’s end. If this is the case, then taking time to understand that problem and determining a way to address it moving forward will bypass potential setbacks later in diligence and help the business show better to potential buyers.
Can You Ensure Your Strongest Customers Stick Around?
In addition, this is also a great time to cement strong customers. This is likely as simple as calling them to say thank you for your business, inviting them to an event or dinner or even showing up to their work to see how they are using your product or service. Internally, make sure these customers are receiving a high level of service from your team.
Also, it will go a long way to ask these customers for their feedback and what else you could be doing to improve their satisfaction. These customers are already doing a large amount of business with you and see major value in what you do, so getting their feedback and ensuring their satisfaction can prevent major surprises, ensure revenue stays strong and even lead to more business or referrals.
Do You Document Your Processes & Systems?
Have you taken the time yet to document the way everything in your business should be done? If not, and even if you have, this is a great time to walk through ALL of your processes to ensure they are operating in the best way possible. This effort can provide great insight to you, your employees and a potential buyer as to how things work and also help evaluate areas for improvement.
When employees know what processes to follow and why, it can lead to a more efficient and effective workforce resulting in higher productivity and stronger financial results. If they all know the processes, take the time to ensure they are all executing them in the correct fashion and a timely manner.
When we’ve worked with owners who examine these processes, we often find that some steps are being skipped. For those, you need to take the time to help staff understand the importance of each step and how best to follow the steps in order to improve results. We’ve also seen owners identify ways to improve efficiency within their processes which have a direct impact on the bottom line and the value they receive at closing.
Finally, showing these processes to a potential buyer can help them better understand the business and identify ways in which they may be able to make improvements and enhance value in the future.
What KPIs Do You Track Internally?
Most businesses have specific KPIs (Key Performance Indicators) that they know they need to focus on in order to measure performance toward goals. In addition, there are often a number of metrics (or numbers) within each of these KPIs that allow them to track progress toward achieving those KPIs.
When preparing to sell your business you should make sure you document all of the KPIs and underlying metrics that you track. You should also document the results of those findings for the past few years, if possible, to show how those numbers directly impacted financial results. This not only helps a potential buyer better understand the business, it also shows that the business is well run by a leader who knows what has to happen in order to maintain and grow.
For example, we’ve seen some leaders manage the business through a score card. This often includes 5-15 high level numbers that the company needs to hit on a weekly basis. This also give the manager a heads up when things are beginning to fall off track and also provides some insight to predict future developments and trends. It is much easier to quickly spot potential issues, or identify strengths, as they come up as opposed to reacting to financial numbers in a statement long after the fact.
Are You Prepared for Future Growth?
As you examine all of the areas listed above, you should also take this time to ensure the business is positioned to execute whatever growth opportunities you plan to communicate to potential buyers.
To start, if you haven’t yet identified ways the business can grow in the future you should start there. As buyers examine businesses, they are very interested in what they could do with it in the future to drive additional growth and profits. Approach this process with this in mind: if someone came in with a bunch of capital and wanted to accelerate growth, what are the best ways they could utilize that investment to get the best results, given how you’ve positioned the firm.
While many buyers will have some of their own ideas, no one knows the business, its strengths and opportunities as well as you do. So, for you to outline what you feel are the best opportunities to pursue, it not only helps them see those opportunities but it may also turn them on to new ideas that they had not yet considered. Those opportunities could potentially lead to a higher offer price when selling your business.
Once you’ve outlined what opportunities the business has in the future, then take time to ensure the business is set up to accomplish those, or at least to get started down that path.
For example, a firm we were recently talking with said that a major growth opportunity for a buyer was to start making acquisitions of other smaller firms in the industry. But when we looked into details of the company, they didn’t have nearly the people or operational structure to support the types of acquisitions they were talking about. This was certainly possible in the future, but it would require a decent amount of investment in staffing, technology and other areas before they could even begin to start down this path.
Another firm had built out pro forma financials stating that there was a huge opportunity to add new customers in a specific area. But when we looked further into their sales structure and history, we found they had not won a new customer in over 3 years, nor did they have the sales team in place to even pursue new customers as they had described.
The opportunities available to a firm, and those that are best for it, are heavily dependent on how the company is positioned and what its competitive advantages are. Having a thorough understanding of these opportunities, and articulating to a buyer how they could evolve, may help the buyer see more potential and increase business valuation.
You should also be able to communicate an estimate of what investment would be needed to pursue certain opportunities. You don’t need to know the exact numbers for every scenario, but you should be able to give them high level guidance. For example, what capacity your current team has and who else would be needed in order to expand into a certain new area. Or approximate new pieces of equipment needed for a certain opportunity and an estimate of what each would cost.
Are There Any Outstanding Legal Issues?
Last but not least, review any past or outstanding legal issues. Are they fully resolved? Is there a simple & cheap solution to get them resolved?
Even if they are not resolvable, do your best to address them as much as possible right now. It’s better to address these issues and attempt to resolve them beforehand so they don’t need to be addressed during diligence. This could potentially delay the process and may signal risk to the buyer, potentially causing them to reduce price or walk away altogether.
Selling a business can be difficult, time-consuming, and frustrating. Before you take the plunge, prepare yourself by reading our 70+ page ebook, The Ultimate Guide on Selling Your Business. Still have questions about selling your business? You can contact us here.
What Is My Business Worth?
You’re either ready to sell your business or considering it for the first time. Understandably, one of the biggest questions you have is one of the most common: how much is my business worth?
The total value you receive for your business may vary depending on economic factors, the premise and standard of value selected, and the valuation method applied. But the true value of any business is its ability to generate future cash flows.
If you want to value a company’s ability to generate future cash flows you need to understand a variety of factors. You can’t simply rely on multiples, you need to understand the business — the products and/or services it offers, its position within the industry, types of customers it has, its competitive advantages and more.
Benefits of a Professional Business Valuation
If you want to understand the value of your business in the current market environment, we highly recommend hiring a business valuation expert. No two businesses are exactly the same, and a valuation expert is an outside party who understands the entire valuation process and has the necessary experience to examine all areas of your business to determine its true value in today’s market.
There are a number of credentials that can help you identify a certified valuation professional. I choose to hold the CVA (Certified Valuation Analyst) designation, but other valuation designations include:
- CBA (Certified Business Appraiser)
- ABV (Accreditation in Business Valuation)
- ASA (Accredited Senior Appraisal)
In addition to discussions with management to understand qualitative factors, a valuation expert will also perform research to fully understand competitive advantages the firm may have, current industry dynamics and the current economic environment in order to more accurately assess the current market value.
Besides helping determine how to price your business for sale, a thorough valuation can also help identify key value drivers and areas that could be enhanced in order to increase business valuation. A good valuation can also serve as an operating dashboard to ensure you are meeting goals and enhancing business value in the future.
Multiple Approaches to Valuing a Business
There are 3 different approaches to valuing a business, and multiple methods within each approach. We don’t need to cover all of the methods in detail here, but it’s important to provide a high-level overview of each approach so you know what to expect when selling your business.
Asset Based Approach to Valuing a Business
This approach calculates value by adding up all the assets of the firm and subtracting all of the liabilities.
This approach is good for estimating the value of a non-operating business — like a holding company, or a business that continues to generate losses. A “non-operating” business does not manage any assets or directly conduct any business whatsoever. As an example, the business may simply collect money and distribute it to the appropriate parties.
Many use the asset approach to set a floor value when determining business valuation. Because if the price offered for a business is lower than the value of its assets minus liabilities ($1,000,000 in this example), then anyone could just buy the business, liquidate all the assets, payoff the debts and be left with more than they paid.
So, for businesses that are able to operate profitably into the future, you will want to value the business as a going concern and the asset approach should not be relied upon.
Market Approach to Valuing a Business
The idea behind the market approach is that the value of a business can be determined by reference to reasonably comparable guideline companies (“comps”) for which transaction values are known.
This is where people use multiples when selling a business. Multiples are simply the result of dividing an actual selling price by a financial metric common to many firms. Although we can calculate them on a variety of numbers, the most commonly used multiples when selling a business are revenue multiples and cash flow multiples.
One of the problems with using this approach for small to mid-sized private companies is that not all transactions report their data, which leaves us with an insufficient amount of information on which to make an assessment. Insufficient data often leads to inaccurate multiples.
In addition, no two businesses are exactly the same, so relying on a multiple for one business does not imply that multiple is the right one to use for another business – even if those businesses are the same size, in the same industry or both. Even if you think your multiples are accurate, you need to understand if those apply to last year’s numbers, training 12-month numbers, annualized run rate numbers or other before you can accurately use them to determine price when selling your business.
Here are a couple simplified examples to show how two businesses, even though they are the same size and operate in the same industry, may have different multiples.
Let’s start with revenue multiples:
If we simply relied on a revenue multiple to value these companies, we may see that each company has the exact same revenue and operates in the same industry, therefore concluding that we could use the industry revenue multiple of 1.2x to determine valuation for each company.
But what if one of the companies had some form of competitive advantage (lower cost to manufacture, more efficient workforce, higher brand image, etc.) that allowed them to obtain 30% profit margins. Meanwhile, the other company had a less trained workforce, older machines, and hadn’t yet developed a brand image, which resulted in them having only 15% profit margins.
Clearly these two businesses should not be valued the same, which is why we can’t rely solely on revenue multiples.
Now let’s look at cash flow multiples:
Note: Many people use EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) as a consistent measure of cash flow between different industries. So, in our examples we use EBITDA multiples.
For this example, we assume the two companies have the exact same revenue and profit margins (unlikely in reality). If we relied solely on the 5x industry EBITDA multiple for companies of this size, we would value both companies at $25,000,000.
But what if one of the companies had only been growing at 1% per year for the past few years (or worse) and was expecting similar growth (or worse) in the future. Meanwhile the other company had been experiencing annual growth of 7.5% (or higher) and expected similar growth (or even better) in the future.
In this example, we just laid out one factor — growth — when there could be many others. But you can see that a prudent buyer would not pay the same amount for each of these businesses, nor should he.
If you feel your business is exactly like all of the other businesses in your industry, then multiples may be fine, but most businesses are unique in one or multiple ways. So, while multiples may be a great starting point for initial discussions, and may be used as a point of reference when comparing to other firms in the industry after you determine actual value, you should not rely solely on elementary math from a limited data set when you’re determining how to price your business for sale.
Note: Recently there has been a lot of focus on recurring revenue businesses, including some software businesses. Many of these businesses have very similar business models and are highly scalable (adding additional customers and revenue results in almost zero additional costs).
Due to these facts, buyers have been simply relying more on multiples of recurring revenue to determine how to price their business for sale. Although still not 100% accurate, it has become more acceptable due to the business models and scalability of these companies. In our opinion, we will see this evolve in the near future to reflect differences in business models, operating costs and competitive advantages.
Income Approach to Valuing a Business
The income approach, and in particular the Discounted Cash Flow Method (“DCF”), is the methodology we place the most weight on when determining how to value a business for sale. This is because the DCF measures the value of a firm’s ability to generate future cash flows. It does this by understanding the uniqueness of each company and capturing the economic dynamics of the business.
Here’s an example of what a discounted cash flow valuation may look like:
Here’s a brief overview of the steps involved in the DCF process and how it determines value:
(There is a lot of detail within each of these steps, but that is beyond the scope of this guide)
- Determine estimated future cash flows for the business
- Determine a terminal value by assuming a terminal growth rate
- Determine a discount rate to reflect the perceived level of risk to future cash flows
- Discount the projected future cash flows, and terminal value, back to today then sum those values.
Step 1 includes a lot of work to understand why historical numbers were as shown, determine accurate adjustments to “normalize” the numbers and prudently estimate future projections as accurately as possible. There are a number of factors that impact this assessment and utilizing a professional with experience valuing a number of firms over various time frames can make a major difference.
Steps 2 and 3 use a variety of economic data as well as industry and company specific data to determine both the terminal growth rate and the discount rate. Step 4 simply applies calculations to arrive at a valuation.
A valuation expert will take the time to gain a thorough understanding of the business, through conversations with the owner and reviewing years of detailed financial information. They also use that info to understand key drivers, research industry dynamics and evaluate the current economic conditions in order to develop educated assumptions for the future
One common criticism of the DCF valuation is that it relies on a lot of assumptions, and therefore the valuation is only as good as the underlying assumptions that were made. In addition, it is nearly impossible to predict what the actual numbers will be in the future. While these criticisms are correct in theory, there is a lot of expertise that goes into the process of making assumptions and projecting financials. This is why it is so important to use a valuation expert to perform a professional valuation of what your business is worth in the current market.
So, while the income approach doesn’t come without potential limitations, many agree that it is the best way to assess the unique factors of each company and it’s why we at Your Legacy Partners give this method the highest weighting when performing our valuations.
Factors That Impact Business Value
While there are many factors that can impact the value of a business for sale, too many to discuss in detail here, below you will find an overview of a few of the more common categories for you to consider as you determine how to price our business for sale.
| Revenue | Types, quality, growth, recurring nature, predictability |
| Profits | Amount, margin, growth, consistency |
| Customers | Quantity, type, concentration, contract, churn |
| Products & Services | Quality, consistency, price, mix |
| Employees | Number, efficiency, tenure, turnover, compensation, management |
| Competitive Advantages | Economies of scale, operational processes, branding, technology, location |
| Growth | Historical, opportunities, projections, resources needed to execute |
| Competition | Number & size of competitors, barriers to entry, positioning, market share |
| Technology | Systems used, quality, innovation, patents |
| Capital Expenditures | Historical, projected, requirements to grow |
Having sat on the buying side of the table for numerous years, we have deep insight into what buyers look for and use that to help our clients who are selling a business get the highest price possible.
We also have an article on “What Buyers Are Paying More For In Today’s Market” which can be found by clicking this link.
The importance of understanding an accurate value of your business in today’s market will help you when evaluating offers later in the process to sell your business. Like many owners, this is possibly your most valuable asset.
One that you’ve dedicated countless hours and multiple years of your life to. There are a variety of things you’ve done to make your business unique and you should settle for nothing less than a thorough and professional assessment of your company, in the current market, in order to determine how to price your business for sale.
Selling a business can be difficult, time-consuming, and frustrating. Before you take the plunge, prepare yourself by reading our 70+ page ebook, The Ultimate Guide on Selling Your Business. Still have questions about selling your business? You can contact us here.