What Would You Pay for Your Business

by

Joan M. Ridley, CEPA, CBI, CFP^®

Think about your company for a moment. Let's call it XYZCo. Pretend for a moment that you are a potential buyer of that business and that you are interested in learning more about XYZCo. If you like what you see, you plan to submit a Letter of Intent. All you know at this point about XYZCo is:

The industry
XYZCo is a C Corp
Gross revenues
Gross margin and
EBITDA

What else as a potential buyer would you want to know?

Will the employees, especially key people and salespeople, remain until you decide if you wish for them to remain?
What is the workflow process? Is it organized and in writing?
Can the company run without you, the current owner?
Is there an up-to-date organizational chart?
Can employees walk away with customers and trade secrets?
Would XYZCo be sustainable if it lost any customers?
Will revenues from current customers continue well into the future?
How profitable is each service line?
Is the financial record keeping accurate and informative?
How does the company's performance compare to its competition?

Is all of this documented, and is all documentation current, accurate and well organized?
If the answer is "no" or "maybe", then, to a buyer, that aspect of XYZCo does not exist.

What's the Risk/Reward Proposition

Knowing what you know about how your business is currently positioned in those areas, as a buyer, would you be willing to acquire XYZCo, for the price and terms that you need, want, or think it's worth? Essentially you are asking a buyer to commit to significant investment to acquire your company. As the founder of XYZCo, chances are that you established and grew the company with cash flow, credit cards, gifts, and loans from friends and family over time. Now you are asking a buyer to take on a significant monthly payment all at once. Improperly positioned value drivers in a company equal risk to a buyer which has a negative impact on what a buyer or investor would pay or borrow. Further, a bank might not be willing to finance a business that is not properly positioned. That means would become the bank.

The point is…

When preparing to sell, think like a buyer from the start. To a buyer and the financing source, your business represents risk. The higher the risk, the lower the value, the lower amount of financing that is justified, and the greater amount you will be expected to finance. Further, what you think or assume is of value to a buyer and banker might actually have a negative effect on value. There is an abundance of buyers and liquidity, but both are very picky. Give yourself plenty of time, 20 to 30 months, to make the needed changes in order to attract top dollar.

Time is Money

If you hope to be out of your business in the next three years, start planning today. Find out how well your value drivers are positioned. You are totally in control of how well your company is positioned, and, when you put your business in play. Where we are in the business cycle determines the optimum time frame. Take action. Take control.

Joan M. Ridley is President of Business Wealth Solutions, a business consultancy that helps business owners create company sustainability in preparation for management or ownership transition. She is a Certified Business Intermediary, Certified Business Exit Planner, and a Certified Financial Planner™. In 2013 she received the first Excellence in Exit Planning Award conferred by the Exit Planning Institute for her pioneering contribution to this new discipline. She is the Founder of the North Texas Chapter of The Exit Planning Institute. Call 214-692-9192 and visit www.bwsllc.net.