Tuesday, May 31, 2011

How do you price your business for sale?

+1 Demo: Async load A lot of business owners have no idea what their business is worth. As a former business broker, I ran into the gamut of people that were ignorant of their business value.

The answer, of course, is that a business is worth what a willing and able buyer will pay a willing and able seller.

However, there are some objective factors to consider. If you are a small business (under $1 million in sales per year) the typical way to consider pricing is using Sellers Discretionary Earnings (SDE). SDE is defined as your net profit PLUS your salary. The value is between 1 to 3 times SDE.

Why the variation? If you have an established business with a large number of buyers that use your services or products regularly, you have a fairly stable business. If you have a company that has a limited number of customers, and your product is based on ever changing technology...you could be obsolete in a month.

Larger businesses, up to $30,000,000 in annual sales, use a different method. They look at Earning before interest, taxes, depreciation and amortization, or EBITDA. In those cases, the selling price is typically three to five times EBITDA.

There is also the issue of owner expertise. If you have a unique skill set or knowledge base that takes years to acquire, your business is limited to buyers that have your same knowledge and skills. You can train a key employee to learn your skills, and have them be included in the purchase. The downside, of course, is that if they acquire the skills, and they are entrepreneurial, they might decide to open their own business, or take the skills that you paid to teach them, and go to a competitor.

These are options for selling your business if it is profitable. What if your company is NOT profitable?

If you have assets, you can do an asset sale. You can sell the assets for pennies on the dollar. If you are purchasing assets, you can purchase the assets in an equity purchase, for pennies on the dollar, and do a firesale of the assets that you don't want, and keep the ones that you do want. It was done in the 80's for corporations and acquired a bad reputation, but it is a perfectly valid manner of increasing your wealth.

If your company has business assets, can you "partner" with another company that is having financial difficulty, to save your business, and theirs?

Example: If you collect your customers name and phone numbers, and have a good relationship with them, can you send a mailer to them offering bundled discounts on your business, as well as the services of another business? Can you sell your mailing list to another company? Can you do a Point of sale referral to other businesses so that every purchase includes a coupon to another company? Can you sell these services to another company to increase your volume and/or keep your company afloat? (It must be a compatible business.)

If your company has unused assets, can they be sold for cash, trade, or services to cut your expenses and raise revenue? (Do you own an empty warehouse that you are not using, or need in the near future?) Can you sell it, or lease it to another business?

Don't trust their books! As a business broker, I discovered that some sellers were lying cheats. They had one set of books for the IRS, one set of books for themselves, and another set of books for their partners. Obviously, I would not trust a thing that these people said. If you are selling a business, you should have accurate and honest records. It is too great of a liability for you to fudge the books. I always told my sellers that I don't care WHAT they actually made, the only books that we would use would be the ones that they shared with the IRS.

If you are thinking of selling your business in the near future, proper record keeping and honest accounting are a pre-requisite, and your accounting system must be easily accessible to potential buyers (after they have signed a non-disclosure agreement).

In summary; if you are wanting to sell, you must show profits, or be prepared to take a huge loss. The more open and transparent your accounting system, the more money you will receive, and the more transferable your business, the easier it will be to sell.

Selling your business

Selling your business By Reed Sawyer +1 Demo: Async load If you are trying to sell your business, the first question to ask is; "Why?" If you have a profitable business, you are not selling it because it is not making money, so you must be selling it for another reason. Why?

If your time is so limited that you feel that you are going crazy, let me offer a different alternative. Hire an employee that can take care of some of the things that you do, so that you can spend some quality time doing something else.

I used to own a dry cleaner. I worked half days (from 7am until 7pm). I hired a part time employee to run the store for a few hours each day, and found that the extra time gave me a lot of stress relief. Can you train your employees so that you can take off early one or two days a week?

The second question is always; Is it profitable?

Profit is having more money than expenses. One of the ways to increase profits is by cutting expenses. If you have a 20% profit margin; (For every dollar that you bring in, you keep 20 cents, after all expenses), then for every dollar that you save, you have achieved the same effect as increasing revenue five fold. Since your selling price is based upon a multiple of your profit (or your gross revenues) a $1 savings in expenses could be worth up to $100 in sales price. Is that enough incentive to be a cost cutter?

How can you cut costs as a small business owner?

1) Printing costs: You need to print things, but your corporate culture should explain to your employees that they should think twice before printing, and that excessive printing cuts profits, and you are monitoring their printing. Any flagrant misuse of the printer for non-business functions will not be tolerated.
2) Vastly reduce printing costs. If you are using inkjet printers, research Continuous Ink Supply systems. For less than $100 you can get a CIS system that will allow you to reduce your color photo printing costs greatly. Instead of spending $50 for a thimbleful of ink, you can spend $8 for a large bottle. It takes a little more work, but it is definitely worth it. (I reduced my costs for large photos from about a dollar a page, to less than 2 cents.) Sometimes you have to invest to greatly reduce savings.
3) Coffee costs. It is possible to cut or eliminate coffee costs. How? By removing the coffee maker and/or having people pay for their own coffee by donating a couple of bucks a day for gourmet coffee. (Again, this is an area that is grossly abused in most companies. I don't provide coffee. If they want it, they can buy their own.
4) Smokers: Do you really want them? One of the biggest productivity wasters is having smokers wander off of their job for five minutes an hour for a smoking break. It is unhealthy, it is unproductive, and they are demonstrating that they make poor choices. If you institute a policy of no smokers, you will greatly increase your profitability. It is NOT discrimination to discriminate against smoking. Also, your health insurance costs will go down immensely.
5) Cell phone use. If your employees are on your payroll, they are NOT paid to answer their cell phones. If they answer their phones on company time, they are stealing from you. If they answer their phones while they are talking to a customer, and make that customer angry enough to leave, they are sabotaging your business. Insist that cell phone use be eliminated at work, and that a ringing cell phone is grounds for a disciplinary action, and that answering one, without express approval for medical emergencies, is grounds for termination. You aren't running a club, you are running a business.
6) Productivity: Prune your payroll regularly of the people that waste your time and money. If they don't contribute enough each and every day to double the cost of their salary, expenses, and benefits, you have to analyze if you want to pay for their services.
7) Outsource: If you have a need for specific services on a regular basis, but not a full time basis...consider outsourcing. You don't need to have a graphics department if you are a regular business, you just need to be able to hire a company that does graphics at a great price. Outsourcing will seem expensive, at first, but a close analysis will probably reveal that it is more profitable to hire the best at reasonable prices, than to have low skill people that are accountable to you. (Also, if you are working with a company, you can give them specs, and have them fill it.)
8) Come in from the monorails: When I was putting myself through school at Disney World, they had the trainers do an exercise that was so simple that it was brilliant. Come in from the monorails. This meant that our training supervisor had us look at things the same way that our guests did. We drove out to the monorails, and came in as a regular guest did. We discovered, by looking with fresh eyes, that we saw things that we didn't see each day.
Take the time to put on your fresh eyes and see things as a new customer does. Is your sign clean and spelled correctly? (You would be amazed at how many times a million dollar business has incorrect spelling on their marquee.) Is your entry area clean? Does it look professional? Can you see yourself, as a customer, being impressed? If not, why not? What can you do to improve for free or cheaply to make it look professional.

In summary, the easiest way to get a business ready to sell is by increasing profitability by decreasing expenses. It is going to be hard, but if every dollar saved increases your sales price by up to $100, it is worth it to cut costs vigorously.