Cashing Out - How Much Can You Get For Your Business?

Photo of Phillip M. Perry

“Time is of the essence.” That old proverb certainly rings true when it comes to selling your business. While recent years have seen sluggish demand for commercial transactions, the market’s on the mend. Today’s business owner can be hopeful that dusting off the “For Sale” sign will bring some attractive offers.

“This is the best time since the 2008 recession to sell your business,” says Rick Rickertsen, managing partner of Pine Creek Partners, a private equity firm based in Washington, D.C. “There are three reasons why. First, there is a lot of economic optimism, and that always impacts what people will pay. Second, banks are getting more aggressive about lending. Third, interest rates are at record lows so buyers can borrow money at favorable rates.”

What Price?

Doubtless your first question will be: “How much can I get?” On the downside, no one is claiming that prices have rebounded to their pre-recession levels. At the same time, prices are now higher than they have been for several years.

The answer to your question depends on the same factor that has determined commercial transactions in decades past: bottom-line performance. Most businesses are priced at a level equal to four to six times their cash flow. “Ultimately buyers care most about the cash your business generates,” explains Rickertsen. (For details on the cash flow method of determining a business’s price tag, see “Pricing Your Pool And Spa Business” at www.aquamagazine.com.)

If cash flow is important, it’s clear that a multiple of six will get you a lot more money than one of four. How can you sell your business at the higher level? Here are some factors that may affect the amount you receive:

• Growth expectations. Can you get a multiple of six or even seven times cash flow? Maybe, if you can convince the buyer of your business’s favorable growth prospects. A retailer with a great concept, notes Rickertsen, might get up to eight times cash flow. A manufacturer with attractive patents, or operating in a high growth niche, can also command a premium.

• Regional economics. Are you are a retailer in a high-growth area such Southern California? Buyers may be willing to pay more for what seems a promising basis for generating higher cash flow in the future.

To up your selling price, you need to put together a convincing argument that your own business will be affected by such factors.

Some business owners believe that brand perception can play a role. Maybe so, if there is some special relationship you have developed with your public. But limit your expectations. “Business owners always think their companies are the greatest in the world,” cautions Rickertsen. “They feel they are loved in their community and therefore they should get a seven multiple. Bear in mind you have to let math rather than emotion drive your price.”

Outside Help

The above material provides a primer on determining a likely selling price. But how about a more structured approach: Is there any value in having your business appraised?

It depends. If there are any extenuating circumstances pertaining to your business, you may wish to pursue an independent valuation. “Often a business owner receiving an offer has no idea what a business is worth,” says Kurt A. Myers, a valuation analyst in Goodlettsville, Tenn. Interest in a valuation can also come from the buy side, he adds: “Sometimes a buyer needs to determine fair value. An appraiser can provide assistance determining a selling price.”

Absent unusual circumstances, you may decide to forego a valuation. Not all business experts feel that one is required. “To hire an accounting firm to do an appraisal for value is basically meaningless,” asserts Rickertsen. “Buyers just don’t care about appraisals — they care about precedent transactions in that space. Suppose you have a five-store retail chain in Michigan that you want to sell. There will be similar retailers who have sold in that market and their sale price will provide insight into multiples.”

In contrast, it’s smart to pay a CPA to have your financials examined since the results can provide buyers with a seal of trust in your numbers. You have your choice of the type of examination. “It is often a good idea to have a CPA prepare ‘reviewed’ or ‘compiled’ financials rather than audited ones,” says Myers. While a review may cost several thousand dollars, an audit may run upwards of $20,000 to $30,000 even for a modest-size organization. “That is a significant expense for a small business.”

Brokers

Also valuable is obtaining a representative in the form of a broker. “You want to hire a representative, an investment banker, hopefully one that has expertise in your sector, who knows who the buyers are,” says Rickertsen. “There is a rich universe of bankers who represent businesses for sale. They help you put together a presentation, contact buyers, and can be your bad guy in negotiations.”

“A business broker can help you prepare your business for sale, market your business and maintain the confidentiality of your sale,” says Dylan Shrader, general manager for BizQuest.com, a Los Angeles-based online marketplace for buying and selling businesses. “A good business broker will know the best avenues to market your business, be it through their personal network, on the Internet or in print.”

Using a professional intermediary such as a broker can be of particular value in keeping negotiations and marketing under wraps. “Keeping the sale of your business confidential is often imperative to the livelihood of the business,” notes Shrader.

Find a broker with knowledge of your local market and your industry. Cast a wide net to garner a number of prospects. “Internet directories and professional organizations are both good places to seek out business brokers,” says Shrader. Some websites (such as BizQuest.com) maintain business broker directories that allow you to search for brokers in your community. The International Business Brokers Association has a certification program that requires members to meet educational and professional standards. Many state and regional associations are good resources. One example is the Ohio Business Brokers Association.

No matter how good your broker, closing the deal often takes longer than you anticipate. “The time required to sell a business can vary, depending on the market,” says Myers. “I seldom see a sale happen sooner than six months after the process starts. And it can take nine months to a year.”

Prepare For Success

Planning is key. “The No. 1 thing is to plan well in advance,” says Myers. “I cannot emphasize that enough. You do not want to be in the position of saying, ‘we’re ready to sell’ and not have your groundwork done. Start planning as early as four or five years before your actual sale. That provides the breathing room to sit down and deal with matters such as potential buyers and what type of corporate structure would be best for a sale.”

And retool your business to appeal to buyers. A selling price can often be improved by changing the basic philosophy of the operation. “It often happens that a business will be operated mainly with tax savings in mind,” says Myers. “Maybe most of the compensation has been going to the owner with the idea of paying the least amount of taxes. You may change that approach to one that is financially motivated. While taxes are still important, you may want to make your business as profitable as possible. From the standpoint of buyers, there is a lot of comfort in seeing a decent number on the bottom line.”

And more: “Try hard to diversify your customer base,” suggests Rickertsen. “It is worrisome to have only one or two customers. The business that has a single customer representing 50 percent of revenues will get a lower multiple than a business where no customer represents more than 10 percent.

“Also, make yourself as unimportant as you can. You do not want to have the business dependent on you. If you can go on vacation for a month and the business can still run fine, then you have a saleable business.”

Address those factors and you’ll have a solid foundation for a profitable sale. “Selling a business successfully boils down to one word: preparation,” says Shrader. “Has the seller done everything possible to prepare the business for sale? Is the business strong financially and showing signs of growth? Does the seller have all the financial documentation ready that will be required in the due diligence process?”

And ultimately, adds Shrader, a successful transaction will depend on a psychological factor: the personal readiness of the seller. “Many business owners underestimate the emotion involved in the sale of a business that they may have spent years and in some cases blood, sweat and tears building up.”

Comments or thoughts on this article?Please e-mail [email protected].

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