Once you have decided that selling your South Bay-based business is the right exit strategy, it’s essential to understand the steps involved in the process. These include having a good understanding of why you’re selling, the timing of your sale, your business valuation, what financial statements are required, the process of finding a qualified buyer, and how you plan to sell your business.
First, approach the sale of your business knowing the reason for the sale and ideally when you would like to achieve it. Are you retiring? Is the performance poor? Are you tired of the risk involved in running a business? Is it just time for a change? These things considered, decide on a realistic time table for getting together the documentation needed to show prospective buyers and allow time to locate them. Also, understand whether you intend to sell all or just a portion of your business.
All potential buyers will be looking for in-depth information about your business, including:
- The reason why you are selling and if it has any impact on the future of the business.
- The financial performance of your business in detail.
- The status of employees in the business and whether those important to it plan to stay.
- The status and value of the real estate involved in your site.
- Proof of all of the information you are providing.
To satisfy these requirements and properly understand the value of what you are selling, you will need to conduct a business valuation.
Your Business Valuation
There are several basic principles that are always part of any business valuation:
Standards of Value
In general, appraisers use several standards of value for businesses:
- Fair market value – The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell – both parties having reasonable knowledge of the relevant facts. It is essentially what a buyer would pay for your business in an open market.
- Intrinsic value – Stock values that investors would consider.
- Fair value – Legal standards to value.
- Investment value or strategic value – The value to specific buyers. This could exceed fair market value.
Approaches to Business Valuation
These values factor into all three of the most commonly used approaches to valuing a company:
- The asset approach – which values the assets of your business minus the liabilities.
- The market approach – which is based on what other, similar businesses are currently selling for.
- The income approach – which derives from the present value of the income stream your business would bring to an investor.
Multiple of Past Earnings
Next, the appraiser will determine what multiple of your past earnings (typically a number from less than one to six) should be factored into the value of your business. This is based on the concept that your business is worth a multiple of your past earnings if a buyer can project those earnings will be maintained after the purchase.
Higher multiples are given to companies that have excellent books, impressive growth, and demonstrated strong potential for future growth.
In determining a multiple for smaller businesses, appraisers often use the owner’s benefit equation. Owner’s benefit equals the net income, plus depreciation, interest, and the owner’s salary and fringe benefits. In other words, it represents all the income available to one owner if the company was debt free. EBITDA is used by larger businesses and includes normalized salary and benefit package for an executive to operate your business.
Business Valuation in a Nutshell
There’s no doubt that the process of business valuation is complex. Summing up the factors we covered, your business is essentially worth the following:
• A multiple of earnings compared to like businesses (gross sales or owners benefit times an industry multiple).
• A capitalization of the net profit 20% to 50% or a simple multiple of owner benefit.
• And if your business makes little or no money, asset value is the only value. (Goodwill + Inventory + Equipment +etc.) Either sold as a whole or liquidated over time.
The financial documentation you will need to complete your business evaluation and show buyers includes historical full-year financial statements for three to five years, plus federal income tax returns for the same years. You will also need your latest interim financial statements as well as aged accounts receivable; inventory ledger and inventory costing policies; fixed asset or property; plant and equipment ledger; aged accounts payable; notes or loans payable; contingent or “off-balance sheet or unrecorded” liabilities (such as pending or existing lawsuits); related parties (or parties with conflicts of interest) and the details of transactions with such; existing contracts or agreements (such as equipment and facility leases); key person or key man information and whether or not he/she is insured with a life insurance policy wherein the company is the beneficiary; owners and their percentages of ownership interest; and a list of patents, copyrights, trademarks and other intellectual properties and intangible assets.
Finding a Qualified Buyer
During the selling process, we utilize the latest technology to present your company to other business brokers and strategic buyers all over the world. This greatly multiplies the effort in your favor. With Transworld Business Advisors of South Bay, you have literally thousands of industry professionals selling your company, yet your confidentiality is always respected.
Our aggressive marketing program includes placing your listing in various industry databases, Internet sites, and publications that are constantly updated. We spend more money in advertising and marketing for buyers than anyone else in our industry.
We organize all necessary documentation and release information only as needed. We use limited information when advertising to maintain confidentiality. Then, buyers are pre-qualified and required to execute a confidentiality agreement before receiving any sensitive information concerning the sale.
Our process attracts thousands of buyers, creating competition for your business. Buyers are qualified for financial ability to meet the offer. We will then reduce that number to only the most qualified buyers. Once you meet the best of the buyers, we urge them to prepare and present all offers.
Add Value to Your Selling Process
Overall, a business advisor can bring exceptional value to the process of selling your business. Here’s why:
- Most successful business people are not experienced in selling process, and the transaction is too important to be left to chance.
- Most people don’t have the time to properly go through all of the steps involved in the selling process without expert assistance.
- You want to keep your business and financial information confidential. This is impossible if you are representing yourself in the selling process.
- You want to get the best price. A savvy business advisor can make the difference between a successful or unsuccessful transaction.
- You need quality representation. The transaction you are contemplating is too important to entrust to someone inexperienced in the field.
- The selling of a business is a very complex process. There are many steps involved, and leaving even one out can have a significantly negative effect on your finances and your future.
At Transworld Business Advisors of South Bay, we focus on your specific industry to get the fastest results for you. Our professionals have years of experience in selling and buying businesses, and they are some of the most sophisticated in the business brokerage industry. Many have owned businesses and can relate to your specific needs. Let Transworld Business Advisors of South Bay help you every step of the way. Contact us at (424) 276-6116.