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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.

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.

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)

1. Determine estimated future cash flows for the business
2. Determine a terminal value by assuming a terminal growth rate
3. Determine a discount rate to reflect the perceived level of risk to future cash flows
4. 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.

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.

If you’re the owner of a small to midsize business, now is a great time to consider selling your business.

Simple: valuations are high — historically so.

…but that’s not likely to last much longer, so if you are considering a full or partial sale of your business within the next few years, it’s likely in your best interest to act now.

What makes now a great time to sell?

There Are Two Factors Increasing Valuations Right Now…

1. There is a large amount of cash that needs to be invested.
2. Interest rates are low.

What This Means For Selling Your Business

Simple: if you sell your business now, it’s likely you’ll make more money than you would’ve in the past (or even in the future — the market isn’t going to stay strong forever).

Why Is There So Much Cash Available to Buy Businesses?

The current bull market has been ongoing since the global financial crisis bottomed out in March of 2009. That’s an incredibly long period of growth — the longest in history. On average, a bull market lasts 4.5 years. We’re at year 10, and it’s still going.

This sustained period of growth across many of the markets has resulted in strong performance for many types of investments. Many people have chosen to lock in their gains on those investments by selling while they are high (#1 rule to investing: buy low, sell high) and now they have cash they need to reinvest.

The Buyers Who Want to Acquire Your Business

Stock Investors – The stock market, as measured by the S&P 500, is up more than 300% (at the time of this article) since its low in March 2009. Investors have profited off of this run, and many are looking to make an additional acquisition.

Business Buyers – Groups such as family offices, private equity firms, and other individual operators buy, operate, and sell businesses. Those who have bought companies over the past decade (or more) have seen many of them experience strong growth in revenue and profits. This means many buyers bought a company, watched it grow, and then had a chance to sell it at a much higher value.

Other Businesses – Other companies that operate in your industry (or a different industry) are often called “strategic buyers” and are frequent purchasers of SMBs for a variety of reasons.

These businesses have experienced strong growth, and are now sitting on a bunch of cash that they want to invest to help grow their business.

Sometimes, this is in new equipment, real estate buildouts, or hiring additional employees. Yet, many companies find it extremely valuable to acquire other, smaller companies that allow them to realize synergies within their current business, expand into new areas, or improve their position in the market.

Why Does This Cash NEED to Be Invested?

For individual buyers, the only real risk of not immediately investing gains back into the market is inflation. Money that sits idle can’t earn a return, meaning that it stagnates over time.

For other strategic buyers, though, investing that cash is required in order to achieve growth.

For Other Businesses (“Strategics”) – Reinvesting in their business is critical for future growth. When markets are strong, some business owners may start by making improvements to their business, followed by making some additional hires and expanding the office. But with a decade-strong bull market, many are still sitting on cash even after making those investments.

Many large businesses continually measure their return on capital and report this back to stakeholders to demonstrate how well the leaders are running the company. If they are letting large amounts of money sit idle, they are missing out on opportunities and doing a disservice to the company which could lead to them losing their jobs in the future.

The leaders of these companies need to reinvest that capital in order to show a strong return on capital, and when these parties have large amounts of cash, they are more likely to “pay up” for another business — like yours!

For Private Equity Funds – Simply stated, private equity funds are a group of individuals who raise money from outside investors so they can operate their “fund.” The principals of the private equity fund then invest in other businesses on behalf of the outside investors in order to generate that return.

If the principals are letting the money sit in cash (and not invest it in businesses) they will never reach the returns that they need to achieve for their investors. If they don’t achieve the targeted return, they may not be able to raise their next fund and they could then potentially be out of a job. Therefore, they NEED to invest the cash that they have.

Likewise, many private equity firms have experienced strong returns on the businesses they’ve invested into. That means they not only have more money that they’d like to reinvest back into the market, but they also have a proven track record of success — which means they’re likely to raise more money from investors in the future, which they want to use to acquire more resources (such as businesses that run parallel to their interests).

So, when owners consider “who can I sell my business to,” the groups above are two candidates that should be on your radar.

How Are Valuations Being Driven Up?

Having all this cash available drives up valuations because there are more people potentially competing for the same business.

When M&A Advisors, like Your Legacy Partners, work with clients (owners selling a business) our goal is to get you the highest price for your business. We do that by helping you improve key areas of the business, preparing quality marketing materials and then creating competition for your firm by bringing as many qualified buyers to the table as possible.

The more competition, the more people will be competing to buy your company — and the more they’ll be willing to spend to acquire it. We’re seeing this play out in today’s market, making this a great time to sell your business.

Why Are Interests Rates So Low Right Now?

There are a variety of factors that impact interest rates, including supply and demand for credit, inflation, as well as the government via the Federal Reserve (the “Fed”). Because there are plenty of academic articles and opinions on the individual reasons, we won’t discuss those in detail here.

With that said, rates are currently low — which is good news if you’re selling your business.

How Does All of That Increase Valuation?

Lower Discount Rates Used in Business Valuation

As Your Legacy Partners often talks about, the Income Approach, and particularly the Discounted Cash Flow (“DCF”) method, is often the best way to value a business because it takes into consideration the unique attributes of each company instead of simply relying on a generic multiple formula. We won’t go into deep detail about this method here.

After calculating future free cash flows for a business, the valuation expert calculates a “discount rate” to apply to those future cash flows and terminal value to arrive at today’s value. The current interest rate is a key factor in calculating that rate, so lower interest rates directly lead to a lower discount rate.

If you divide any number (In this case future value of cash flows) by 2 different numbers (discount rates) the lower discount rate will result in a higher valuation for the business.

Lower Interest Rates Entice More Borrowing to Finance a Purchase

When you sell your business, each buyer will need to determine how they are going to pay for that acquisition. There are a variety of tools and structures that can be used to acquire a business that we won’t discuss here, but a very basic list includes cash or debt.

When interest rates are high, that makes it more expensive to use debt (resulting in a higher cost of capital) and many buyers may choose to use cash, stock or other means to make the purchase. But when interest rates are low, this entices a buyer to use more debt, since it is cheap, which would allow them to buy a larger business or pay more for the same business.

There are a variety of factors to consider when deciding to sell your business and determining what value you may receive for it when you do sell. But two factors that can have a major influence on that valuation are the amount of cash that buyers have to invest and the current level of interest rates. In the current environment both of these factors are strongly in the seller’s favor, but it certainly won’t last that way forever.

So if you are the owner of an SMB, it may be well-worth your time to sell your business now — or to at least consider starting the selling process.

If you have questions or would like to discuss getting started selling your business, we would be happy to schedule a no-obligation call to decide if the time is right for you! Contact us today.

As an entrepreneur you also want to keep abreast of your company’s worth. Determining this in itself is a complex process made up of many different attributes. So in this installment, the focus will be: Competitive Advantage.

Competitive advantage is the attribute that allows as organization to outperform their industry competition. Having a clearly defined competitive advantage helps pave the road towards a strong market position, creating a sustainable business model, enabling strong margins, proving the ability to scale up or down, and more.

Before you can start to work on creating an Competitive Advantage, there are 3 key points that you need to know.

• Who your target customers are.
• What is the true benefit that your customers get from your product or service.
• Who are your competitors and what are they doing.

You need to know these things in order to demonstrate to the market how your product or service creates more value to your customers than your competitors do.

Porter highlighted 3 main ways companies can achieve a strategic competitive advantage.

• Cost Leadership: Offering a valuable product or service at a lower price than the competition. Being able to apply this strategy when your business is still new can be difficult. Part of the reason that larger companies can keep their cost low is because their sales can already justify buying product in bulk and taking advantage of the bulk pricing. Something that can be applied to a business that is still in it’s growing stages is to keep a tight rein on overhead costs. Make sure that you can keep your operational costs and low and consistent as possible. This will help reflect a lower cost to your customers, and help them be more willing to come to your over the competitor. That said, don’t be tempted to let the quality drop for the sake of less expensive costs. This will damage any advantage you are trying to build.

• Differentiation: Providing different and better benefits than anyone else on the market.  This specialty can be associated with design, brand image, technology, features, dealers, network, or customer service. Some of these avenues are achievable with very little extra investment. For instance, design will be something you have to consider regardless. This can apply to visual design and operational design. If you are smart and diligent about the decisions you make regarding this process, you are spending practically no more money in the end. Another area to point out is customer service and experience. Training your employees is a system that will need to be put in place regardless, so why know provide the best training available, to ensure that your customers are not only satisfied, but impressed with the level of service they receive?

• Focus: Your company truly understands the target market and services them better than anyone else in the industry. Think of a car dealership, besides the selling of vehicles, most modern dealerships have a service center. Many of them are filled with the same amenities, seating (comfortable or not), reading material, and a television. 20 years ago, that would be sufficient, but in today’s market, is that really meeting the needs of your client? Be smarter, don’t waste your budget on so many expensive magazine subscriptions, invest in having a WiFi service. Instead of potential uncomfortable seating, make sure you have a combination of seating and workstations for those clients that may need to wait around for their service appointment.

Within your business, do you understand what your competitive advantage is? Are you Effectively using this to get ahead of your competition? If so, buyers are ready to pay a higher price to buy your business. If not, it may be worth it to take some extra time to determine what it is before proceeding with the sale.

If you need help determining your competitive advantage and valuing your company, call Nick at 1-866-850-8440 to start an evaluation. We look forward to all that we can build together.