“I have a medium sized company which I have owned for about 20 years. We specialize in the manufacture and distribution of chemical products and have built a good business. However, my children aren’t involved or interested in the business so I am considering selling it. The problem is that I have no idea how to begin the process.”
Since most business owners only sell a company once in their lifetime, it is quite understandable when an owner makes such an inquiry. While the thought of selling their company may seem overwhelming to many business owners, if thought in terms of small steps instead of giant leaps, it is really quite simple.
What is the initial question that comes to mind when you think about selling your business? One might guess that you wonder how much someone would pay for it. Well, your first thought is the very first step you should take towards the ultimate goal of selling your business. Get a valuation to get an objective price range that you could expect to receive in the marketplace. It’s that simple.
Typically, the documents needed to determine the preliminary most probable price range of a company are:
- Tax Returns for 3 years
- Profit Loss Financials for the most recent 3 years
- Current year-to-date financials
- Furniture, Fixtures, and Equipment List and
- Business Summary Questionnaire that helps us understand your business.
Again, as you can readily see, the required items for a valuation is not complicated. Several years of financials helps paint a historical picture and current trend of the company. Upward trends are the desired scenario.
Since profits on financial statements and tax returns of privately-held businesses are usually minimized in order to reduce income taxes, the financial statements are restated in a valuation to demonstrate the actual income-generating ability and financial performance of the business.
As part of that process, a professional business broker / intermediary will ask easily-answered questions that will help determine which expenses are discretionary in nature or are not strictly necessary. There will be other expenses that may be non-business related benefits going to the owner and family members, or one-time, non-recurring or unusual expenses that would not be borne by a new owner of the business. These expenses will be part of the true discretionary cash flow that would be enjoyed by a new owner.
This valuation should clearly outline the details that buyer prospects and their advisors would need and can understand. It should be assessed on the same premises lending institutions use for the purpose of determining if the price makes sense.
Just as an athlete might get a physical to determine their preparedness for a marathon, you should also measure your Company’s fitness for the marketplace. A valuation is an unbiased examination of your company’s marketability and helps you pinpoint where your company is in its business cycle. It is the foundation, the meat and bones, on which a business owner can base their readiness to sell.
Other considerations in determining the business value will include competition, regional demand factors, proprietary products or processes, what type of buyer
the company would attract, favorable lease terms, advantageous supplier relationships, management’s desire to exit or stay with the business, concentration of customers, and many other relevant factors.
Your company’s history of earnings represents its financial health and can establish the baseline for the monetary worth of the enterprise. The single most important factor for valuation is how much money the business makes. This figure should be maximized and be shown to be maintainable under new ownership in order to get the best price possible when the time is right
. Buyers pay for the past, but buy for the future.
Most owners never take the necessary steps to plan their exit and end up selling because of unexpected events or crisis-driven reasons rather than on their own terms. According to members of the International Business Broker Association, 75% of business owners do not know the market value of their company. This is too large a number considering how painless a task it is to achieve.
The sooner you take the first step in determining the value of your business, the more informed and comfortable you will be in planning your next step…..whether it be deciding the time is right to sell now, or making improvements for a future sale.