15Apr
I’m thinking of selling – How do I value my business?
Wait a sec, before we start with valuation methods; you have made sacrifices, risked a lot, worked long hours for many years and now you are ready to cash out with the biggest payday of your life!
Please do not rush this process, it needs to be done right, mistakes now will cost you hundreds of thousands or maybe millions of dollars depending on the value of your business.
At WCT we have experienced this many times over the past 30 years, we have had big wins and experienced major stuff ups, and learned invaluable lessons along the way.
We have read 100’s of IM’s, conducted due diligence more times than we can remember, been on both sides of the transaction, a buyer and a seller, and have a treasure trove of experience.
No need for you to make mistakes – learn from our experience
1. Prepare your business for sale
This involves, your branding, website, marketing, people, P+L and balance sheet and total honesty about your businesses strengths, weaknesses, threats and opportunities.
Then you must prepare a very professional IM (information memorandum). The first thing a buyer will see is this IM, then they go to your website and your brand.
A poor preparation will result in a lower price, or the buyer simply walking away! You have to reflect your business in the best possible light. The buyer always looks for honesty, transparency and upside.
2. Do not rely exclusively on a business broker to set the price.
Most business brokers are the same as a real estate agent, they see business sales as a numbers game, the more listings the more sales, simple. They take a commission on the sale of your business, so they just want a sale. And like real estate agents, the lower the price you are prepared to take, the easier it is going to be for them to conclude the sale.
There are good brokers and bad one’s, some work the high end of the market and others the lower end. The reality is many are just like a dating agency, no better than Tinder, they match a buyer to a seller, and you have to do the rest. The high end is generally covered by M+A divisions of leading Accounting firms.
Always confer with your Accountant about the selling price, and even then you may still be missing out, but you will be better off.
3. Valuation metrics
99 x out of 100 Your business will sell for a multiple of your historical financial years EBIT. (earnings before interest and tax). There are exceptions, where you have considerable IP (intellectual property) or very fast growing revenues that will return solid profits at a future point in time. But generally it’s a multiple of EBIT.
So what is the multiple? Well that depends on three main things:
- How fast is your business growing?
- Are you selling to a private or public company?
- Do you have strongly defendable points of difference or IP?
Other factors that could have an impact:
- selling to an overseas purchaser.
- M+A activity in your industry, and
- Strong recurring revenue and cash flow
The important take away on valuation is this; unless the valuer has a deep understanding of your business and the market place, any value they give you will be wrong and that could cost you a lot of money.
4. Get the best Attorney and Accountant
So many SME business owners fall flat on this one. Never ever, try and cut costs on Accountants and Lawyers.
Get the best commercial lawyer you can to handle the sale of your business. The purchasers lawyer will draft the agreement but your lawyer will ensure every safeguard is there to protect you, your shareholders, and your big payday.
The same applies to your accountant, their biggest value add will be around tax, and with your biggest payday, proper tax advice is not negotiable.
5. Timing is everything
You may have heard this before, and it is true. It is a simple business principal, if you sell into a strong market you will get a higher price than selling into a weaker one. Putting your business on the market at the right time will make a substantial difference to your sale price.
To your success...
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P.S. If you would like to find out if your business is ready for sale, then take the quiz below.
To get started, simply rate your business! Our easy 10 question survey will tell you exactly where you are in the selling process and what you need to work on.
Simply rank each question from 1 to 10 where 1 is where you have not started and 10 is where you are confident you have this covered.
- A score close to 100 indicates your business is ready for sale.
- A score lower than that means you will not maximise your asking price and will be “leaving money on the table”.
- A score below 50 means you have plenty of work to do before putting your business on the market.
1. All key customer relationships are owned by senior employee’s, and you do not contribute to sales.
2. All sales contracts can be legally assigned to new owners.
3. Your Brand and website are superior to your top 3 competitors
4. All staff have had salary reviews in the past 6 months and this is all documented.
5. Annual leave entitlements do not exceed 21 days per staff member.
6. All your key employees are locked in and will remain with the business after the sale. They have letters of employment and signed confidentiality agreements.
7. You have a detailed asset register with values attached
8. You have a 36-month historical revenue and GP report showing results by product/service and financial forecasts for at least the next 12 months
9. You are clear on the difference between selling assets and selling the company and the tax impacts of both.
10. Your financials can withstand an audit by a top 5 Accounting Firm
11. Your business has produced positive year on year Ebitda that has grown at least 20% p.a. for the past 3 years.
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