“How much is my company worth?” and “When is the right time to sell my company?” are two questions I often get from my privately held clients. These are both critical questions in the process to decide if you want to move forward with a sale of your company, but these questions need to be asked and answered well in advance of that decision.
For most business owners, their business is the most significant asset in their investment portfolio — and with the highest emotional attachment. Whether you started your business from the ground up or are part of a family business that has succeeded to you, there is likely a deep emotional attachment to your business. In fact, it may be a significant part of who you are and what you have accomplished by bringing it to this point.
When it comes to understanding the value of your business, it is important to separate how much the business is worth to you and how much it is worth to prospective buyers. This difference can be significant, and bridging that gap early on will help save time and bring you to a realistic decision.
Using business valuation experts or learning about recent sales in your industry to determine a baseline value will help to speed up this process. If you do decide to move forward and sell your business for maximum value, there are three important steps that you need to take.
1. Make yourself redundant
A buyer will pay you more for your business if it can operate successfully when you are no longer there. If all of the business, operations, customers, purchasing and finances are tied to you and your abilities, then so is the value of your business. Prospective buyers want the business to be sustainable without depending solely on you. If the business needs you, then they will tie you to the company by making the purchase contingent upon entering into a long-term employment contract with you, as they need you to stay on board to run the company to help it succeed. This will lengthen your time frame to wind out of the company, but also transfer the risk of the purchase price and value of the company from the buyer and over to you.
2. Get legally and financially prepared
Legally, you will want to ensure that you have all of your legal documents and contracts signed, ready, and available for a buyer. They will require access to all of these during their due diligence of your company, so you will want them organized and properly documented. Financially, you will want the earnings of the company and financial stability to be at its peak to maximize your sales price. This may take years of planning and cost cutting measures to strengthen the financial statements of your company.
Buyers typically use a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) to value your business, and will look back at a few years of historical performance to determine the sustainability of those numbers. Being able to show buyers multiple years of growing EBITDA or consistent EBITDA is very important. They will also focus on working capital in the business, which typically is a formula of accounts receivable + inventory + prepaid expenses — accounts payable — accrued expenses. Although the value of your business is tied to a multiple of EBITDA, it assumes that this base line of working capital is in the business on the day of acquisition to be able to run it effectively. It is important to manage your working capital efficiently as you get ready for a sale.
3. Have forecasts and your strategy ready and available
Create forecasts to share with your prospective buyers, and be able to articulate the vision of the future of the company to coincide with that plan. Buyers can also make emotional decisions if they believe in the management group and their vision for the future.
If you have thoughts about selling your business, it’s important to start asking these questions now. Start planning and building your team of key management members and professional advisers (accounting, tax, legal, mergers & acquisitions) to help support you and guide you through the process.
Citrin Cooperman is a Top 25 nationally recognized full-service assurance, tax, and advisory firm with offices conveniently located throughout the Northeast.