In the previous episode Cashing-In Part 1 – How to Exit Your Business, we looked at the different exit options a small business owner can consider for selling his or her business. But once you decide to sell your business, business valuation becomes one of the most pressing items to consider. As a business owner, you've labored long hours for many years to build the business. You sacrificed to overcome financial, economic, competitive and unforeseen challenges. You managed to stay afloat in tough times and get ahead in good times. Don’t let your guard down now. Make sure you have the right people behind you guiding you through the exit process and helping you maximize your cash-out package.
Small Business Valuation Video
Today, we are investigating how a business owner can maximize the value of his or her company to get the most out of the exit transaction. This is a must-watch video for anyone that is in the market looking to sell a small business.
What You Will Learn in this Episode
In this video, host Dennis Zink and his two expert guests Peter Gruits and Eric Robinson discuss the following topics:
When someone buys a business, what are they buying?
Why should a business owner establish the value of their business?
What methods are used to value a business?
Are businesses in different industries valued differently?
What is goodwill and how that factors into purchase?
Why would one company be worth more than another in the same industry?
How can the SCORE team with the Exit Strategy Program increase the value of a business?
How do owner benefits impact the value of the business?
What is EBITDA?
What are multiples?
How much negotiating room is there in a deal?
What kind of earn-outs are there?
Does the Small Business Administration (SBA) make loans when someone is looking to buy a business?
Is it difficult to get a non-compete from employees after the sale?
What should an owner not do, when selling a business?
SCORE Advice Excerpts
“Value means a lot of different things to a lot of different people, but in SCORE, our Exit Strategy team focuses on trying to figure out where we're going to fix the leaks that are in the business. The value leaks that occur within a business, and in effect, how can we look at that business, so we can retain value? Areas where the value will leak is possibly in having too much of your concentration in a few customers, having customers that don't really work out to be profitable, spending most of your time with unprofitable customers... It could be you have too much dead inventory, you have inventory that's obsolete, you're paying for space to store it, that's a leak... You could be doing too many of the things yourself, as the owner, and you're not really holding yourself to the performance standards of the business, that's a leak. The SCORE Mentors are there to help you identify and fix those leaks,” said Peter Gruits, SCORE Mentor.
“The Seller has to put on glasses that are reflective of what they would do if they were going to buy the business. And that means, you have to put so much money down, that means you have to, in effect, get a loan through some kind of lending institution, that means you may have to take back paper. It means you may have to enter into an employment agreement, so that comes down to the terms and conditions of your sale,” Gruits added.
Accounting Advice Excerpts
“I think that SCORE can actually increase the value of a business by requiring you to plan, by making sure that you do your homework, by making sure that you look at, "What is driving the value of my firm?" Then, you can make sure that you gear your actions towards that valuation, and that metric, to increase the overall value of the firm. I think SCORE allows you the ability to focus in, because sometimes you're an entrepreneur, and you're very disjointed and disorganized. They allow you the ability to focus and hone-in on what is really important and what is the seller going to be looking at. Because you're looking at it as the entrepreneur, sometimes you got to look at it as the seller, and sometimes they're not always looking at it the same way,” Said Eric Robinson.
“Multiples are basically derived from multiple factors, it’s the stability of the cash flow. If you have somebody who only has one client, you're probably not going to give it as much of a multiple, because if that one client leaves, what do you really have? If it's a high-growth company, then you're going to give it a larger multiple because the income's going to increase over time. If it's a more stable company or a declining industry, you're probably going to give it a lower multiple,” added Robinson.
Dennis Zink, SCORE Manasota Chapter Chair
Peter Gruits, Volunteer SCORE Mentor, Leading the Exit Strategy Program.
Eric Robinson, Partner of Robinson, Gruters & Roberts, a Venice, Florida, CPA company
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