So You Want To Sell Your Business

As the baby boomer generation approaches 60 more and more business owners will begin to look at the option of selling their business as a way to finance their retirement plans. One critical aspect of this process is the valuation of the business from a market perspective versus the business owner who has a tendency to place a higher value on their business than the market will. This in turn makes the closing process unduly tense and as often as not will lead to a non event when it is time to sign on the dotted line. So what can be done to set the table for a completed transaction?

One must start with an understanding of how value is created in the business arena. In many respects it is the same as buying a stock, which is investing in a public company. An investor buying your business is investing in your company. You start by looking at earnings, – is the company profitable and how are its key metrics in relation to the industry overall? Is it better than its competitors, the same, or worse? You then move to cash flow- specifically what is called Free Cash Flow. Free Cash Flow is defined as net income plus depreciation & amortization minus working capital and minus capital investment needed to sustain the revenue stream. Ultimately a business is valued as a multiple of income and or Free Cash Flow.

After the earnings and cash flow are determined, a risk factor is added that measures the sustainability of this cash flow. The riskier the investment, the lower the price. There are a number of things that go into the risk profile of the business. Is there a strong management team in place that can function without the owner being present? Is the market the business operates in a growing market or is it declining? Are there new products in the pipeline? What is the level of customer satisfaction with the business? What is the quality of the products or service? How strong is the corporate culture? Is the compensation structure appropriate to the business and industry?

Each of these sections could have its own white paper written on it. But in addition to the top level review of the business, looking under the hood must be clean as well. Surprises will raise risk and lower the value of the business. Are the financial statements accurate? Are there potential claims brewing that have not surfaced? Is the business OSHA compliant? Is the software, especially mission critical software, properly licensed or owned? A buyer will ask to look at everything pertinent to understanding the business. You, as the owner, need to be confident that everything is communicated accurately upfront. At the end of the day, would you purchase this business for this price at this point in time, knowing what you know?

As a partner with B2B CFO^® I am prepared to help you put your best foot forward when looking to sell your business.