Important Points to Consider When Selling Your Business

Written by Roberta Caputo Posted On Friday, 19 April 2024 12:27
Important Points to Consider When Selling Your Business Image by Gerd Altmann from Pixabay

Thinking of selling your business?  To sell for the best price financials must be accurate and up to date and lack any internal or external issues that potentially could affect the salability or price of the company. If any of these aspects need improvement, selling your business can become challenging if not addressed properly. A Business Broker’s responsibility is to ensure, to the best of their ability, you receive the market value earned   for your business!

Determining the Correct Selling Price

Prior to listing your company, the Broker should provide a valuation which will indicate your business’s most probable selling price. 

The valuation process includes - a complete review and analysis of your financials: Federal Tax Returns, Profit and Loss Statements and Balance Sheets for the previous two to three years, including year to date, Balance Sheet and Profit and Loss Statements.

When a business broker prepares a valuation for a smaller company, they will first review your financial statements to obtain an accurate understanding of your cash flow or Seller’s Discretionary Earnings (SDE). Any personal, non-cash, or non-recurring expenses will be added back to the net profit along with the Principal’s/Manager’s salary; this allows the broker to have a clearer understanding of the financial health and performance of your company and determine where there may be room for improvement. This information, along with a risk analysis will determine the most probable market/selling price of your business.

Generally, for larger businesses, Brokers will calculate the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). They will then research local, regional, and national comps in the same Standard Industrial Code (SIC) with similar size, gross revenue, and bottom-line profits along with other factors that affect the multiplier and are consistent with the business they are valuating. This research and analysis will determine the multiple applied to the SDE or EBITDA, which will yield the most probable and accurate selling price. In the context of a business sale, a multiplier refers to a numerical factor or ratio used to determine the value of the business. It is typically applied to a financial metric of the business, such as its earnings, revenue, or cash flow, to calculate its selling price. The multiplier is used as a multiple of the chosen financial metric to arrive at an estimated business valuation. The specific multiplier used can vary based on several factors, including the industry, the business's financial performance, market conditions, and the negotiating power of the buyer and seller. 

Pricing Your Business within Market Parameters

In today’s technology driven world, populated with many savvy buyers, these buyers will conduct their search using many different factors: profit to resale price, SDE and/or EBITDA are most often included. When a business is listed outside of market parameters, it simply will not show up in either broker or buyer searches, decreasing the likelihood of a sale. If the buyer is utilizing an SBA backed lender, the sales price must correlate to their third-party business appraiser’s valuation.

Underpricing a business has its limitations as well! Again, we are dealing with many educated buyers who have become suspicious of underpriced business opportunities. The seller may be missing out on a much higher sale price than the price it is being advertised.

The Importance of Keeping Your Financials Clean and In Order

Business owners need to resist the temptation to minimize taxes by manipulating inventory or not depositing the cash receipts. These practices can reduce the value of your business and the sale price. 

Let us illustrate: ABC Company received One Hundred and Twenty-five Thousand Dollars in cash over the year from their customers. They decided to deposit only Twenty-five Thousand Dollars from that amount to avoid the tax ramifications of having to pay Thirty Percent 30%, Thirty Thousand Dollars, on that deposit amount in taxes.  How does that undeposited One Hundred Thousand Dollars affect the sales price when it is time to sell the business? If the valuation and research support a three-time multiplier of either SDE or EBITDA, that would equate to a Three Hundred Thousand Dollar reduction in price! The Seller would be forfeiting Two Hundred and Seventy Thousand Dollars in a sale price to save Thirty Thousand Dollars in Taxes!!! Certainly not a worthy exchange!!! 

Again, savvy Buyers will not pay for proceeds they cannot borrow against or what is not included on the Tax Returns. Buyers believe the Sellers have already made their profit on the unreported funds.

That brings us to Personal Expenses. Sellers often inquire if personal expenses will be added back to the SDE or Adjusted EBITDA. The answer is yes and no! Interest, Taxes, Depreciation, Amortization, one time or non-recurring business expenses will be added back.  In certain circumstances a personal vehicle or insurance can also be added back to the cash flow. All added back expenses must be paid by the company and documented. It is our goal to have your business pre-qualified by various lenders to ensure you receive cash at closing in lieu of a Seller held note. This pre-qualification will most often allow a buyer to purchase the business with only ten percent down instead of the full asking price in cash at closing. A bank pre-qualification exponentially expands the pool of buyers financially capable of purchasing your business!

Risk Factors and the Salability of Your Company

Several elements that make a business more saleable. If you are an owner operator, do you have a written “Standard Operating Procedure Manual” to assist the buyer post-closing? Does your business require a specific license?  Will you or another employee remain post-closing to qualify the business? Do you run your business as an absentee owner? If not, does your company have a management team in place with the ability to run the business? Will the management team be willing to stay after your departure? Do you have any employee(s) that can assume all your job responsibilities? If there are any types of concentration issues with customers or suppliers, it should be addressed, when possible, prior to listing your business. Concentration issues can inhibit your ability to sell your business at market price, devaluing it sometimes, by as much as forty percent! Addressing these challenges prior to listing will greatly enhance the salability and price while increasing the pool of available purchasers!

Is Your Business Ready To Sell?

These pointers are designed to assist you in organizing and addressing key issues that can greatly enhance a smooth transition and the long-term success for both you and the buyer.

If you are ready to sell a business or begin to structure your business for a future sale, please contact Capital Business Solutions, 956-596-8060 to initiate the process with a free consultation and/or valuation. Our experienced Brokers will provide you with a stress-free transition! 

About The Author

Roberta Caputo is the President and Managing Broker of Capital Business Solutions - a full-service business brokerage firm connecting sellers of businesses with qualified buyers and acquisition specialists around the world. Roberta is the recipient of the prestigious Deal Maker of the Year for the State of Florida, 18-time recipient of the prestigious Million-Dollar Plus Award, Top Dealmaker Award and is the Author & Materials Expert for Kaplan University’s course on Business Brokerage.

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