Making the decision to sell your small business, and your life’s hard work can be tough. Nevertheless, having the fortitude to make this decision as a business owner you must now plan for the future. We always advise our clients to make sure that they are fully committed to selling their business, for example, I had a client of mine who was an owner of an athletic franchise and he simply couldn’t manage the day-to-day operations. We recommended that he hire a general manager to handle the day-to-day rather than simply getting rid of the business. As an entrepreneur, your passion lies in either selling your product or service to other individuals and businesses, not in doing the accounting or handling the financials.
Before making the decision to sell your business, you must perform due diligence in regard to how to make this process as smooth as possible. Here are a few ways you can do that:
- Hire an experienced CPA who has dealt with M&A and created certified valuation reports.
- Do some industry research on what similar businesses have sold for in your city or state.
- Get a good attorney on your side to protect yourself from any litigation once the deal has been closed.
- Be 100% sure that you are going to sell your business, because often times business owners back out once they see the final valuation figures.
The point that I want to emphasize in this article above all is the fact that you need a competent and experienced CPA on your side. I cannot tell you how many times I have seen in my practice sellers with out-of-shape financials trying to sell their business and expecting a fortune. When speaking with a CPA make sure that they create a Certified Detailed Business Valuation Report. Larger companies will hire investment bankers and valuation analysts, in the case of a small company let’s say a company with revenues between $200K and $500K; all you need is financials, forecasts/projections, and financial statements.
While this article won’t go into the details of what a business valuation report contains (because frankly its a very dry and boring subject matter) – I will attempt to explain what you as a business owner need to know. Especially since this decision will impact you and your family for years to come. Let’s say your business sells for $500,000, and you make annual cash flows of $150,000, for an investor that’s an annual pre-tax PROFIT return of over 25% which beats the 10% return from the stock market!!
Investors can truly make a killing if they select the right type of deal, for the seller its more complicated. Thus you must ask for a decent valuation/purchase price because if you don’t then you could be potentially leaving thousands of dollars on the table. Af course I am not telling you to over-price your business, but there are certain items on the financials which must be closely examined.
What am I talking about here? I am talking about the EBITDA (Earnings Before Interest Taxes Depreciation & Amortization). If you own a smaller business then you are going to multiply whatever your EBITDA is by a multiple 3 or 5. Will the valuation always be 100% correct? What you must keep in mind is that the business you’re buying/selling isn’t a public entity, so don’t expect an EBITDA Multiple of 6 or 10. Of course not, but the fact that your CPA produced impeccable financials and a detailed business valuation report, you are more likely to capitalize on a sweet deal.