Here are three key numbers to focus on when considering the sale of your business: Your Number, the Market Value of Your Business and the Gap between them.
I’ll call the first number Your Number. Your number is what you need to realize from the sale of your business to achieve your post-business sale objectives. You will notice that Your Number has nothing whatsoever to do with the value of your business.
Your number may have a number of components. In many cases, it may be the amount of liquid assets you need to assure a comfortable retirement. A financial planning specialist can help you come with that number. In other cases, it may include the cost to buy or start another business you plan to start or buy following the sale of your business.
In general, Your Number will be calculated by taking the amount of liquid assets needed to finance post-sale activities comfortably, less the amount of liquid assets you have available, such as retirement and other savings.
The Market Value of Your Business
The second number to focus on is the market value of your business. The market value of your business is based on many factors, including both the value drivers of your particular business and general economic conditions. Ultimately, of course, the value of your business will be determined by an offer from a potential buyer that you are willing to accept. Many times, market value can be estimated by taking the businesses sustainable EBITDA (earnings before interest, taxes, depreciation and amortization) times a multiple. The specific multiple for a particular situation is going to vary based on the nature of the business and the specific characteristics of the business in question. Developing your market value is even more involved than selecting a multiple to apply – there are a host of issues to address and consider, which usually requires professional assistance.
The third number l will call Your Gap. The Gap is the difference between the Number and the market value of your business, after adjusting for taxes and transaction costs.
What are your options if you are contemplating the sale of your business and you have a Gap?
One alternative is to simply dismiss the idea of selling your business. This may or may not be a good alternative.
The other two possibilities are to look for ways to decrease your Number or to improve the value of your business.
How can you decrease your number?
Decreasing your number will require either making changes to your plans post-exit to reduce their cost, such as relocating to a less-expensive location or downsizing the house you intend to buy or by identifying additional sources of liquid assets to help fund your post-exit plans. Opportunities to identify additional sources might involve acquiring a new business, working part-time as a consultant and lots of other possibilities.
How can you increase the value of your business? There are many ways to accomplish that goal over time by focusing on the value drivers that determine value. Among the key ones are:
- Building a growing, profitable business
- Avoiding having the business dependent on you as an owner
- Building recurring revenues where possible
- Avoiding having the business too dependent on any particular employees, customers or vendors
- Building strong, documented sales, operational and administrative systems.
Over time, you can build the value of your business to narrow your gap. Building value takes time. In the short term, you will likely need to look for ways to decrease your number.