The average number of businesses sold from 2007-2012 was less than 8,000 per year. With the baby boomers getting ready to retire, that number is expected to grow to 378,000 per year for the next 20 years. If you are going to sell your company, you need a business ready to sell and a great success team available to help you.
There are 5 major areas that will affect the success of selling your company.
- How much is my company worth?
- How much money do I need in retirement?
- What is a success team and why do I need one?
- What do I have to do to get my company ready to sell?
- What is the timing of the process?
I will talk about each of these items over the next 5 posts. Please know that I am giving you the 10,000 foot view. My goal is to make sure you are informed so you can intelligently talk to your success team.
- How much is my company worth?
This will be the number one struggle you have. Without exception, the buyer will not value your company as high as you do. There are two reasons for this. First, the buyer is not emotionally invested like you are. This company is almost as important to you as your family. For the buyer, it is a financial transaction. Second, you think you need more that you probably do to maintain your lifestyle.
In its simplest form, the value of a company is its EBITDA times a factor. EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization. The factor is a number, mostly defined by the market, multiplied by the EBITDA to come to a value. If you want to get a ballpark number of the value of your company, follow this formula:
|Tom’s Example||Your Company|
|Net Income from your 2013 Income Statement||475,000|
|Plus Interest Expense from your 2013 Income Statement||47,500|
|Plus Income Taxes from your 2013 Income Statement||28,750|
|Plus Depreciation from your 2013 Income Statement||15,225|
|Plus Amortization from your 2013 Income Statement||-0-|
|Value (EBITDA times Factor)||2,832,375|
The actual calculation of EBITDA will be much more complicated that this simple presentation – but you can get an idea of your company’s value by going through this exercise.
The factor a buyer uses in valuing your company, and making an offer, is based on your industry, the size of your company and then adjusted for risk variables. The higher the risk, the lower the factor. Here are some risk variables that will affect the factor:
- Financial trends for the last 3-5 years. Are trends improving or getting worse?
- How long has the company been in business? The longer the better.
- How strong is the management team? What happens when the owner departs?
- How good are the operating systems? Are procedures documented?
- What is the potential for future growth?
- Are there threats from outside (lawsuits, major competition, patents running out)?
From today until the day you finally sell your company, you want to consider these items and make sure your company gets a high grade in each category.
The common theme through all my posts related to selling your company is start the process now and be vigilant in maximizing the value of your company. An unintended positive consequence of doing this is you will have a better company. By implementing better business practices, your margins should increase, your company should be more efficient and your bottom line should improve. All good.
See you next week. We will talk about how much money you need for retirement (it’s not as simple a calculation as you think).