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Mar 30Tom Matthews

How much can you sell your business for?

Mar 30Tom Matthews

There are approximately 28 million small businesses in America.  Of those, baby boomers own more than 12 million of them.  As those baby boomers get closer to retirement age, the number of businesses going up for sale is increasing dramatically.

Historically, almost 45,000 small businesses sold each year.  Because of the baby boomers, that number is expected to rise to 378,000 businesses each year for the next 10-15 years.  If you plan to sell your business, you probably have some work to do in getting ready.

Conventional wisdom tells us the best businesses always sell – and sell for a fair price.  Do you have one of the best businesses?  How do you know?  Here are some measures:

  • Are your sales growing year over year?
  • Is your gross profit percentage increasing year over year?
  • Is your net income growing each year – both in total dollars and net income percent?
  • Is your revenue per employee increasing year over year.
  • Are your balance sheet ratios (working capital, return on assets, debt to equity) improving year over year?
  • Are all of these numbers better than your industry’s averages (do you know what your industry averages are)?
  • Do you have ongoing employee training programs?
  • Do you have sufficient cash reserves?

These are all items that would influence a buyer’s decision to purchase your company – and what price he is willing to pay.

Here is the basic formula for valuing a business:

SDE (seller’s discretionary earnings)

       Times

Valuation Multiple

+ Cash

+ Accounts Receivable

+ Inventory

– Accounts Payable

SDE is a fancy term adjusted net income.  For companies with earnings over $1 million, we calculate EBITDA (earnings  before interest, taxes, depreciation and amortization).

The valuation multiple varies by industry, by company size and by the buyer’s belief that your company is well run or not.  I purchased a report called Small Business Valuation Multiples, 2016 Edition.  It gives us a range of multiple paid for companies in various industries (with net income less than $1 million per year).  Here are a couple of examples:

Industry Low end of multiples High end of multiples
Clothing Manufacturer 1.77 3.47
Millwork 2.02 3.45
Interior Designer 1.10 2.52

 

Let me give you an example of the sale of an interior design firm:

 

  Poorly run company Well run company
Earnings $900,000 $900,000
Valuation Multiple 1.10 2.52
Value $990,000 $2,268,000
Cash $50,000 $50,000
Accounts Receivable $100,000 $100,000
Inventory -0- -0-
Accounts Payable ($30,000) ($30,000)
     
Seller’s Offer $1,110,000 $2,388,000

 

There is a big difference in offer price based solely on how well run your company is.  In discussions with  my B2B CFO®   partners, the minimum time it will take most companies to their maximum multiple is 3-5 years.

There is a side benefit to creating a continuous improvement program:  you will make more money, you will have happier workers and you will sleep better at night.

One quick note before I end this post.  The multiples I listed above are for businesses with less than $1 million net income.  Once you are beyond that threshold the multipliers go up – generally they will start at 3 and top out around 6.

Let’s get this process started now!

 

B2B CFO®

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