The Value Surprise in Selling Your Business
In this post I describe a frequent problem our firm encounters with founder/owners looking to sell their business.
Recently a client mentioned that she was thinking of selling her existing business to start a new venture. This conversation is not unusual in our practice as we have many serial entrepreneurs. What was surprising was the gap between what she thought her business was worth and the likely value a buyer would be willing to pay. She thought that a buyer would be willing to pay $6.5mil for a business that would receive offers at roughly half to two thirds of that amount.
I suggested we talk through the “value” from a buyer’s perspective. Revenues in her business have run consistently over the last 3 years at about $5.0 mil. annually. Expenses are predictable and she is able to achieve pre-tax net running about $1.0 mil. annually. Her customer base is solid and pretty loyal. As with many small businesses, there are a lot of personal expenses running through the P&L. As we drilled down I also noticed that 20% of her sales come from just one customer.
I suggested a revised look at her P&L would yield the following:
I suggested that a buyer would likely look to pay roughly 1 times adjusted revenue or perhaps 5 to 6 times adjusted pre-tax net income for her business. This calculation would yield a likely offer range for her business between $2.9 and $4.3 mil.
After this exercise the owner wanted to rethink the idea of selling in the near future. She realized that she could have a very large and positive impact on her results by making small changes in the business, implemented over time.
The value gap is one of the most common surprises owners experience on the road to transitioning from their business. The process of selling a company is complicated, expensive and fraught with risks before, during and after the process is complete. Most owners are financially dependent personally on the net proceeds of the sales process. And, most have zero experience with how closely held businesses successfully change hands.
To maximize the realistic pent up value of any business; make sure to have a financial advisor with M&A experience take a look at your P&L. These professionals can help you bring a dose of realism to your assessment of likely selling price. Additionally, once you get comfortable with a pre-tax range of likely selling price, move on to assessing the impact of taxes, selling expenses, effort, time and risks associated with successfully implementing a process that results in the sale of your business. Also, don’t forget that you will need to go through an extensive due diligence process with the buyer to prove up the facts you’ve represented in the sales negotiation.
This education process can help you avoid nasty negative surprises owners report experiencing during the sales process. Finally, with good counsel, owners and their stakeholders will uncover small, minor tactical and strategic adjustments that can be made over time that will dramatically improve the results they achieve from a sale.
Doug Kennedy has extensive knowledge and hands-on experience in building robust foundations for family offices and serving the role of trusted advisor. He performs business advisory services and financial consulting work for a variety of family-owned businesses from start-ups to mature successful enterprises. His experience has been spent in family dominated publicly owned companies, high net worth individuals, estate planning, wealth management, succession planning, leadership transition and risk management.
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