What is the Value of Your Business?
You’ve owned and operated a business for many years, yet you’ve never stopped to have a valuation done. You’ve always wondered what your business is worth. If you were to go to market today, what would a buyer pay you for your business?
There are methods used by M&A advisors that will tell you on paper the value of your business. Your valuation may include terms such as Discounted Cash Flow, Enterprise Value, and Book Value. A more common valuation method used in the lower middle market (businesses that sell between $2M and $50M) is determining the Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). In other words, what kind of money your business is producing, and then using that Adjusted EBITDA number with an industry multiple to establish your price.
How is Adjusted EBITDA Determined?
If your year-end net income before taxes is $800K and your interest, depreciation and amortization is $200K then your year-end EBITDA is $1M. We then need to normalize or add back/adjust expenses which the buyer will not see, such as a family member on your payroll yet not working or a frivolous lawsuit that has been settled. If the total normalized expenses equal $200K then your Adjusted EBITDA in this example would be $1.2M. When determining your Adjusted EBITDA number, you want to look at the last three years using a weighted average.
How Are Multiples Determined?
M&A advisors look at industry comparables (comps) to establish your multiple. The best comps are not only in your industry but current and within your geographic area.
When brokers around the country were recently surveyed by M&A Source the 3rd Quarter 2023 median multiples were 4X for businesses selling between $2M-$5M and 6.5X for businesses selling between $5M-$50M. The survey was not industry specific. In the above example, with the Adjusted EBITDA at $1.2M, if your multiple is 4X then your value is $4.8M.
What Are Buyers Looking for in a Good, Sellable Business?
First off, they want to avoid as much risk as possible. As you can see in the multiples above, the larger the business, the less risk anticipated by the buyer. One reason is larger businesses usually have processes in place to minimize risk compared to a smaller firm. Smaller firms tend to rely quite a bit on the owner, which can be very risky if the customers are still calling the owner for orders.
Buyers want to see that your books are clean (such as no personal expenses to the business) and that the numbers are trending upward. Do you have a bookkeeper on staff and is a strong CPA guiding your firm? Buyers are always requesting updated numbers right up to closing and your financial team will play a big part in making sure the buyers’ profit concerns are answered.
As the buyers do their due diligence, they want to truly understand your company culture. Do your employees love coming to work? Have you set up your company to promote from within and do you have a non-qualified profit sharing or bonus plan that motivates the employees as they participate in the profits of the company?
How Can You Get Top Value When You Sell Your Business?
Engage an exit planner or coach 3-5 years before you plan to go to market. Two resources to find such a person are exit-planning-institute.org and score.org. We have found companies that have been coached sell quicker and sell for a higher price. Your coach will evaluate your business to make sure the business is not too dependent on you (the owner), that you have the proper management team in place, and that you’ve corrected any excessive customer or vendor concentration that could send buyers running. They will also review your processes such as having Standard Operating Procedures (SOP) in place and making sure you are achieving Key Performance Indicators (KPI’s).
There are multiple ways to improve your business’ performance which in turn will improve its value. Plan early and engage the right professionals and if you’ve taken the correct steps when you decide to go to market, your business could very well sell for much more than book value.
This article was written by Sam Thompson, CBI, M&AMI. Sam is the president and founder of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming a business broker, Sam was a successful CEO and business owner for 29 years before selling his $16 million conference and event management company. If you have questions about this article and would like to connect with Sam click on the link below.