It takes a while for an owner to decide to sell their business. Most of the companies I help are sellers who are getting ready to retire; studies show that 40 percent of small business owners are baby boomers born before 1964. They’re ready to spend more quality time with their spouse or their nine irons, so they’re finally serious about putting their company on the market.
My job is to make sure they don’t get any unpleasant surprises. That’s why I offer a Broker Opinion of Value at no cost to an owner who’s within a couple of years of selling. A Broker’s Opinion of Value is an assessment of a company’s worth put together by a broker or intermediary on behalf of an owner. While this valuation is not a formal appraisal, it’s backed by market variables, comparable sales data, and up-to-date industry knowledge. Combining these data sources with a company’s financial performance, market position, customer base, equipment value, and organizational structure gives a broker and owner a starting position for a pricing strategy.
Getting a broker’s advice years before you sell has other important benefits. Your broker can advise you if your operations or financial records could be improved before putting your company on the market. They can also inform you about how buyers and lenders examine the business before making an offer.
Here are some of the data points they will consider when providing an estimate of value.
- Clear and well-organized financial records: Buyers and lenders want to see complete and transparent financial documentation. Anything that is not well documented or unclear will be a red flag.
- Profitability trends: Buyers will want to examine the last 2-3 years of tax returns and financial data. If your company is trending downward, it will be less attractive to most investors or buyers.
- Company structure and owner involvement: If the current owner, partner, or spouse works full-time in the business, the buyer will have to estimate the cost of replacing their labor and experience. Companies with a structure that includes foremen and other experienced and trusted workers are more valuable than a company that’s wholly dependent on the owner working every day.
- Customer concentration: A company whose revenue is based on just one or two large accounts could be unsellable. I always coach owners to diversify their revenue, so that losing a single account is not a disaster for the business.
- Comparables: Knowing what other companies of similar size and with similar revenue have sold for is a large part of valuing a business. Comps provide the best estimate of what a company might sell for (aside from or in addition to its calculated value.)
- Seller’s Discretionary Earnings (SDE): This is actually the bottom line for most buyers: What can I expect to earn if I take over this business? Multiples are based on this value (rather than top-line revenue), which is why clear and accurate financials are so important.
When I work with an owner preparing to sell the company, I help them understand the mindset shift they need to make: from earning to value. Most owners place an emphasis on tax avoidance while they’re running the company. Every dollar they can write off as a business expense saves them about 35 cents in taxes. But when you sell a company, you want to ensure that every dollar goes back to the bottom line. It’s a strategy that pays off in a big way; instead of saving 35 cents on that dollar, you’ll be earning as much as three to five dollars in multiples from the sale.
That’s why I like working with owners who have a timeline that gives them up to a couple of years to diversify their revenue, increase profitability and SDE, and develop a strategy that gets them the best price possible for their company.
If I can help you understand the value of your business and how to improve its marketability, the first step is getting a confidential and complimentary 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 who he teaches 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 is 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.