When I talk to owners considering selling their businesses, I often get asked what “the most important number” they should focus on is. In my experience, there are three very important numbers (among many other numbers that also matter). If you clearly understand and control these, your business will attract more and better buyers and generate more value when you sell.
Gross sales are among the most important things many owners think are important. Sales matter, of course, and companies with higher revenue attract more interest, but this number can be deceiving. Trends matter as much as the raw numbers do; buyers look at the last three years of business to see whether your numbers, no matter how high or low, are increasing or decreasing. They’re less likely to be interested in a company with slowing sales, no matter how big the revenue number is.
I’ve also seen companies whose revenues have gone down but whose profitability went up. They decided to let go of their least profitable accounts, which made their company stronger even with lower sales.
The most important number, for a buyer, is without doubt Seller’s Discretionary Earnings (SDE). This is the bottom line – it’s what tells a buyer how much he can expect to earn annually when he takes over the business. And this is a number that is very much in your control. Understanding why it’s so important can help you make better business decisions.
Many owners operate their companies from a position of tax avoidance; every dollar they write off on their taxes means more in their pocket. But when you are thinking of selling a business, the opposite is true. If you clean up your accounting and eliminate all personal expenses from your books, you’ll pay a little more in taxes. (If you’re in the highest bracket, generally 37 cents for every dollar you add back.) But your Seller’s Discretionary Earnings is what buyers are actually paying for, often with multiples, so you may get paid three to five dollars for every dollar that went back onto your bottom line. That’s why this is the most important number. If you’re thinking of selling in the next year or two, you should be working to increase your SDE, even if you wind up paying a bit more in taxes.
There are other numbers you should be paying attention to. Customer Concentration: no one customer should make up more than 10% or your monthly revenues; having a customer that’s too big to lose is a red flag for buyers. Recurring revenues: buyers are looking for a steady business that generates predictable monthly income. It’s what attracts many buyers to this industry in the first place. Under revenues, they’ll also be looking at your Average price per project, or whether your pricing is in line with the market, and Cost of goods and labor, which goes back to profitability.
The good news is that you have a lot of control over your numbers once you understand where they come from and how important they are to the value of your business. If I can help you analyze your numbers and strengthen your bottom line before you sell, a good first step is to get an opinion of value.
About the author: Jim Parker
Jim Parker is an experienced business broker specializing in lawn and landscape businesses. His company is based in Clermont, Florida. As an industry leader, he has served as the past president of the Business Brokers of Florida and currently sits on the International Business Brokers Association’s Board of Governors. Jim is a sought-after speaker, teaching others in his industry best practices in ethics, closing transactions, and finding qualified buyers. He has earned over 50 awards and recognitions in his career.
He is a Certified Business Intermediary (CBI), Certified Mergers and Acquisition Professional (CMAP), Masters Certified Business Intermediary (MCBI), and a Mergers & Acquisitions Master Intermediary (M&AMI. He is one of one of less than 20 business intermediaries in the world that have all four of these designations. To contact Jim, visit TheLawnBoss.com or call (407) 927-8999.