Republished with permission from Built to Sell Inc.
If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.
A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.
Obsessing Over Your Multiple
This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.
Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.
How Profitability Is Open To Interpretation Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.
This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.
Let’s take a simple example to illustrate. Imagine you run a company with $3 million in
revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.
You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.
Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees.
Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.
Whether you’re in a subscription business, or still using a transaction business model, how you treat a customer in the first 90 days will go a long way in determining their overall satisfaction. To benchmark your customer satisfaction against world class brands, get your Value Builder Score now http://www.ironshield.ca/sellability-score/
Why not find out now if your business is sellable?
This free online tool is the only no-risk step you can take to determine if your business is ready to get full value. Fast-track your analysis by taking advantage of this free, no-obligation free online tool.
This Sellability Score you instantly receive is a critical component to any business owner’s complete financial plan and is something that, until now, we have only made available to existing clients.
However, we recognized that there is value in knowing in advance of working with a financial planner whether or not your largest asset is ready to be exchanged for your retirement nest egg. Our view is that you are better to learn more about your businesses sellability today and find out how your business scores on the eight key attributes so that you can ensure you obtain full value.
If your business part of your retirement plan, finding out your sellability score will be the best 10 min. you could ever spend working “on” your business.
Take the Quiz here: The Business Sellability Audit
For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.