February 20, 2024

My Business is Worth What????? Pros Weigh-In on How to Manage Your Own Expectations When Selling Your Business

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If you read this newsletter with any regularity, then you know that very few business owners actually successfully sell their business to a third party. There are many reasons for that, but today, we will focus on the elephant in the room—PRICE—namely, your comfort level in dealing with the real value of your business, which I guarantee will be lower than you expected.

Meet the Experts

I’ve gathered three experts to help me with this:

Laura Leopardi, a CPA and an Accredited Business Valuator, who is also certified in Financial Forensics, with 25+ years’ experience in analyzing the values of businesses in many different industries. To learn more about Laura, you can visit her website here: leopardivaluation.com.

Lisa Riley, PhD, CEO of Delta Business Advisors and Founding Member of Cornerstone International Alliance (Premier M&A firms serving the lower middle market), has helped hundreds of business owners buy and sell. Additionally, Lisa has been an active Board Member for the M&A Source, the International Business Brokers Association (IBBA), and the Arizona Business Brokers Association, and has had the honor of being elected as Chair for the latter two organizations. Click here to visit the Delta Business Advisors website and learn more about Lisa: https://www.deltabusinessadvisors.com/team/lisa-riley/.

Diane Thomas, who started and sold her own successful business in CA, and then purchased Premier Sales, where she has also helped hundreds of business owners grow value and exit. Diane also co-founded Legacy Advisors, which is a nationwide business continuity and succession planning firm. To learn more about Diane, you can visit the Premier Sales website by clicking here: https://www.premiersalesaz.com/our_team.htm.

Because these women offer such great insights…look for a Part Two and maybe a Part Three to this blog.

Business Valuations & Emotions—We Get It

PETERS: When you begin thinking about selling your business, do you need a formal valuation?

LEOPARDI: A business valuation is the best report card that a private business owner can get. Business valuations estimate tangible and intangible value, benchmark financial and operational performance with industry standards, normalize earnings and cash flow, may identify multiples paid for other similar companies, and can validate or challenge Indications of Interest or Letters of Intent.

THOMAS: Exactly. Every business owner can calculate their EBITDA with a market multiple. However, this does not give a clear picture of what the market value is. Factors such as market projections for growth in various sectors can influence buyer interest (i.e., low or declining growth projections = low interest = fewer buyers = lower value). Obtaining a valuation from a professional will help business owners understand the market value. They can then make an informed decision, such as “maybe this is not the right time in the market to sell” or “this LOI is excellent.”

PETERS: Why is there such a disconnect between what a business owner thinks their business is worth and what it is really worth?

RILEY: Business owners often place a high value on intangible assets, like customer loyalty, brand recognition, reputation, and goodwill. Although these elements are crucial and can increase a business’s value, their worth is harder for potential buyers to quantify. Buyers tend to focus on tangible assets, like inventory, equipment, and real estate; however, they are primarily concerned with cash flow, as it directly impacts the return on investment.

THOMAS: There are also two other factors: (1) misinformation/misinterpreted information about the values of businesses sold; and (2) blood/sweat/tears invested by founder/owner.

  1. Misinformation/Misinterpretation: Inc. Magazine often publishes multiples on earnings received for various businesses, but it lacks ANY context. It is entirely possible that a company with a very low EBITDA sells for 10 times – but likely because real estate is included in the deal. And if they had the actual deal points, maybe the business sold for next to nothing and the majority of the purchase price was for the real estate. Lack of transaction details leads to misinterpretation. Misinformation comes into play when brokers list a business at any price just to get the listing. Business owners then equate the listing price to the value of their business, and that may be a very different picture from value that converts into cash.
  2. Blood/Sweat/Tears: There is never enough money to compensate an owner for the blood/sweat/tears and agony of establishing a business. Business owners are a different breed. They do what they do for reasons beyond monetary. It’s the game. Yet, businesses are bought and sold based on objective metrics that result in a monetary number.
PETERS: How can you take some of the emotion out of the valuation process?

LEOPARDI: Interviewing parties impacted by the valuation can reduce uncertainty and emotion. People are more likely to partially or fully accept value opinions in which their input was considered. Communication and engagement are key. Explaining how and why things are handled can alleviate uncertainty. It is important to note that valuations performed for different purposes may result in materially different outcomes.

RILEY: It helps to educate yourself on the factors that influence the value of your business. By understanding the ‘why’ and looking at your business as if you were going to acquire it, you can have a more objective and realistic perspective on its value.

  1. Quality and Sustainability of Your Earnings: Buyers will look at your historical and projected financial performance, especially your EBITDA (earnings before interest, taxes, depreciation, and amortization) or SDE (Sellers Discretionary Earnings {EBITDA + 1 FT owner operator salary}), which measures your operating profitability. They will also evaluate your revenue growth, profit margins, cash flow generation, and working capital management.
  2. Strength and Diversity of Your Customer Base: Buyers will assess your customer relationships, retention, satisfaction, and loyalty. They will also consider your market share, penetration, and potential. A concentrated or dependent customer base can lower the value of your business, while a diversified and loyal customer base can increase it.
  3. Competitive Advantage and Differentiation of Your Products or Services: Buyers will examine your value proposition, innovation, quality, and pricing. They will also analyze your industry trends, opportunities, and threats. A strong and distinctive competitive position can enhance the value of your business, while a weak and commoditized position can diminish it.
  4. Efficiency and Effectiveness of Your Operations: Buyers will review your processes, systems, policies, and procedures. They will also inspect your facilities, equipment, inventory, and technology. A well-managed and optimized operation can boost the value of your business, while a poorly-managed and outdated operation can reduce it.
  5. Caliber and Continuity of Your Management and Staff: Buyers will evaluate your organizational structure, culture, and communication. They will also scrutinize your leadership, talent, skills, and experience. A high-performing and committed team can elevate the value of your business, while a low-performing and unengaged team or lack of team can lower it.
In Part Two of this blog, we will discuss multiples. As always, don’t hesitate to reach out if you need any assistance in preparing your business for sale.