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About once a month, I get a phone call from a plumber’s wife or partner. They share with me that the plumber is ready to sell their company — finally — and move on to retirement or the next chapter of life.
As they share their stories, my heart often breaks. Their businesses are just not worth very much. While they deserve millions for the blood, sweat, tears and cash they have invested, the company itself may not be sellable.
Let’s explore if and why you might want to sell your business and how to set yourself up for success.
The if is not really a thing. Consider that every business is going to transition at some point. My best friend Al Levi refers to the Ds. Death, disaster, divorce, disease, disability, debt, even family drama — these events can change lives radically and sometimes instantly. At some point, your business will transition or transform. You are well-served to envision and plan for what you’d like to have happen.
So why sell? When you are ready to move on, what would be relevant to you? Creating wealth? Funding your retirement? Building a family legacy? Simplifying your lifestyle? Offering opportunity to loyal and capable employees?
As my friend Howard Partridge says, “Your business exists for one reason only; to help you reach your life goals.” Consider that your business is like a vehicle, a truck that can drive you toward your goals. The main thing to remember is your business is not you. No matter what you choose to do, or what happens to your business, it does not reduce your value as a human being one jot.
Often, we associate our self-worth with our career or business, and that just isn’t the way it works. You can build or fix a business. You can buy and sell businesses. You may want to set yourself up for increasing the value of your company and give yourself multiple options for using it to create more money.
Money helps, no matter what those goals are. Your profitable, systematic business can create wealth for you in two ways:
1. By generating profits and cash through day-to-day operations.
2. By enabling you to sell the company for the promise of future profits and cash.
That promise of immediate, additional profits and cash is compelling to a buyer. The highest value — selling price — is found when your company demonstrates, via your financial reports, the ability to consistently and predictably create sales, profits and cash. Your selling price gets even higher if you have some heft (multiple millions of transactions) and the company runs without the owner’s daily involvement.
Valuing your company
So, what kind of money are we talking about? There are many ways to value a company. Here are some basics:
• The earnings approach. EBITDA stands for earnings before interest, taxes, depreciation and amortization. Earnings is another word for profits.
This valuation method takes your earnings and adds back the noncash expenses and expenses that may change dramatically when the company is restructured. This calculation is usually done using a few years’ worth of data.
Next, those profits are applied to a multiplier. Essentially, the buyer is looking for earnings he can count on and exceed over a period of time.
Multipliers range from 1 to 10 or more. They have everything to do with the strength of the business and how interested the buyer is. Note that this method is generally used for companies with multiple millions in sales and solid operating systems.
Recurring income will add to the multiplier. So will an excellent reputation, rockstar branding, an awesome team, depth of management or a desirable location.
For example, if you demonstrate $5 million or more in sales with 20 percent ($1million) in EBITDA over three years, and the buyer offers six times earnings — the selling price would be $6 million.
• The asset approach. This refers to selling all or part of the assets of your company.
Even if you don’t have a lot in profitability, you may have valuable real estate or a just-right building. You may have large, well-maintained equipment. You can sell your business in pieces to different buyers if it helps maximize your selling price. You could sell the business assets and keep the real estate or building and create rental income.
Nontangible assets can be valuable! Do you have top placement on Google and other Internet platforms? Data confirming those ads deliver results is uber-important.
How many calls do you get every day? Calls equal sales opportunities. A buyer will spend 10 percent or more on marketing; you may craft a deal that pays you instead.
• The cash and/or stock approach. Some big conglomerate companies troll for acquisitions to maintain their ambitious sales and profitability goals. You may be approached by one of them; I know many contractors who have experienced life-changing exit strategies. If you have $5 million or more in sales, I imagine someone has been knocking on your door already.
For smaller companies, you may want to owner-finance the deal. There are tax implications with every sale, and the tax strategy can make the construct of the contract as important as the selling price.
• The fair market value approach. You deserve a mountain of gold for the time, energy and resources you have put into your business. However, similar to real estate, it’s only worth what someone will pay for it.
Setting up for success
So, what’s required to maximize your options when it comes to selling your business?
• Do you have a business plan? Regular business retreats are a good practice to adopt. I wrote “The Weekend Biz Plan” as a simple agenda for getting the management team on the same page.
Assemble key team and family members, and get clear on what you really, really want. Sure, money plays a role. So may ease of exit. Or opportunities for team members. Or what will be required of you moving forward.
Start with the ideal and clarify the goals. Then put your list of projects together. Identify projects that will make your company more systematically profitable, such as getting the manuals written and implemented. Or raising prices and updating the price book. Assign tasks and hold team members accountable.
• Consider who can or would buy the company. Employees? Perhaps this is an awesome opportunity to reward and develop the skills of your key team members.
Family members? I know soooo many kids who overpaid for their parents’ business. I call this enslaving the children. Be willing to visit with others in our industry who have successfully transitioned their companies.
• Don’t take any of this personally. Remember, your business is just a vehicle. Put the pride aside.
• Patience is a virtue — and necessary. It may take a while to tighten up your company and prep for sale. And rushed deals are usually not the best deals.
• Be willing to walk away. When it comes to signing the agreement, more important than what’s under the pen is the person holding the pen. Take a gut check and be willing to say “no.”
Disclaimer: I’m not a lawyer, so don’t hold this information to any legal standards. This is strictly one woman’s observations and thoughts. I have been involved in or privy to dozens of acquisitions and no two have been the same. I am just scratching the surface here, to help you get a feel for possibilities. My intention with this column is to get you interested enough to learn more about this topic. Email your experiences and comments to email@example.com.