Perhaps you are actively pursuing selling your business or just toying with the idea. We tapped into the expertise of our Pro Back Office CFOs and their years of experience in selling and buying businesses. Here are their words of wisdom when considering the sale of your business.
KNOW WHERE YOU ARE IN THE BUSINESS LIFECYCLE
Your business may be worth significantly more or less, depending upon where you are in the lifecycle of your business. Planning to sell your business should ideally take place a long time before you actually do so. Knowing where you are in the lifecycle, and planning accordingly, is an important first step.
- Many valuation professionals and investment bankers encourage companies to formulate and implement an exit plan 3 to 5 years prior to the desired exit window
- You may need up to 5 years to hone your strategy and map executional actions to achieve and maximize the plan
In starting early, you are identifying steps to take or should consider taking that will result in positive benefits right away.
- You can start increasing profits immediately
- You will demonstrate a pattern of higher earnings, which substantiates a trend, and should potentially increase your business valuation.
While there are many formula approaches, for a business valuation, the valuation generally comes down to:
- Adjusted Earnings or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
- A Valuation Multiple which is generally tied to the type of business and the variables in the business. For instance, a professional services firm with non-recurring contracts could get a valuation of 3x EBITDA where a recycling company can get a valuation of 10x EBITDA. Improvement in the multiple will generally have a larger impact on your business valuation. By increasing from a multiple of 3x to 4x is an increase of 33% in value.
FACTORS THAT CAN IMPROVE YOUR MULTIPLE and YOUR VALUE
- Sustainable record of growth in revenue and number of customers
- In-place management team that has a solid long-term incentive plan
- Well defined and documented internal processes that provide a highly scalable overhead structure
- A proven project management approach
- Solid contract administration
- Up-to-date, off-the-shelf, widely-used software
Generally, the better the overall management of your business, the higher the multiple and consequently the higher the value. Indicators of solid business management include:
- Reviewing monthly financials including comparisons to your budget/plan
- Reviewing your monthly balance sheet
- Monitoring leverage ratios
- Monitoring key performance indicators
Strong business management indicators include:
- A committed management team who can deliver budgeted results
- The ability to explain company financial results with operating aspects
- Strong and well-maintained internal process, software and administration
- Business performance forecasts
- Analysis of performance to estimate at the job level, if applicable
- Maintain and manage a work in progress (WIP) schedule for projects, if applicable
While these steps can result in an enhanced valuation upon the sale of your business, they are also tools that will improve your current business performance by increasing profits and managing risk now.