As an entrepreneur and business owner you may have had thoughts about that inevitable day in the future when you will leave the business and enter the next phase of your life. You may be considering a traditional retirement, or perhaps you have a lifelong passion that you will now have time to pursue. Whatever your unique situation is, a successful Exit that meets your personal and business goals will require careful planning.
The value of your business will play a critical role in your future. What you receive for the sale of your business, and how you receive it, will have a significant impact on the funds available to support your desired lifestyle.
What is your business worth?
Generally speaking, when it comes time to sell your business it will be worth what an independent objective third party will be willing to pay for it. In other words the market will determine the price. So it's critical to understand how the market will value your business, and what you can do to influence the price in your favour. Many factors will come into play but there are some basics to keep in mind.
- Think of your business as you would any income producing asset, like a commercial or residential rental property, or shares in a public company. Like rental or dividend income, the revenue stream generated by your business will have a certain value to investors.
- The market typically values a business based on a multiple of cash flow. Cash flow is defined as earnings before interest, taxes, depreciation and amortization (EBITDA). The multiplier will vary based on the characteristics of the business and the industry. Generally speaking small and medium businesses will sell for 3 to 6 times EBITDA.
The highest valuations will go to those businesses that have the greatest potential for profitable growth. Preparing the business by maximizing earnings growth in the years leading up to the sale and having a clear strategy for sustained growth will ensure a maximum valuation for the business.
The recent sales of comparable businesses is another strong indicator of how the market will value your business.
Potential buyers will be exacting in their due diligence, focusing on management, profitability of the business, growth potential, and operational efficiency.