You’ve poured your heart and your soul and your blood, sweat, and tears into your business for years, and recently you have started to think about what you are going to do when you aren’t making countertops anymore.
Do you plan to retire and travel, or do you plan to start investing in real estate or is there something else you plan to do?
So, here’s a question: How much does that cost? How much money do you need to make that happen? When you think about it, this is really the amount of money you need to receive from the sale of your business. Essentially you need your business to sell for enough money to allow you to realize whatever your plan is for this next phase of your life.
Let’s say that your plans require you to get $3M cash from the sale of your business. How do you get your business to the place where it can give you $3M from the sale?
First, you need to know how the value of a business is determined. While there are several methods for determining this value, the most significant component in all of them is some function of net earnings. In a broad sense, net earnings are multiplied by a factor that is driven by some combination of industry type (countertop vs metal working vs retail store), the local economy, how well your business is structured to run without you (a big one!), and others. This factor will likely be a number between 1 and 6 (for this industry). Here’s an example of how the factor is applied:
- Your annual net earnings are $500,000
- A business broker determines your multiple to be 3
- $500,000 x 3 = $1,500,000
Your business would generally be valued at $1,500,000 plus, if you own the building and land, this would be added as well. At the end of the day, the buyer is determining how long it will take for the business to generate enough cash to pay for the purchase. The buyer also wants to be confident the cash flow will continue into the future so they can get a return on their investment.
A big question I get when discussing this with shop owners is, “How can I influence the multiple?”
Obviously, as the seller, you would prefer a multiple of 6 vs a multiple of 2.
But what drives that multiple?
The most significant factor in the multiple is how well your business is structured to run without you (the owner) present in the business. Are you able to take 2 weeks off and not be constantly pestered with emails, texts, and phone calls that need your attention? Will your business continue to run and be profitable if you aren’t there every day?
If you think about it, when someone buys your business, they want the business to continue to run without you being there. The buyer also wants to be able to assume management control of the business without having to spend years learning the business. Pro tip: Not all buyers of stone businesses come from inside the industry.
For this to happen (and for you to get the highest multiple) you need to have robust business processes that ensure consistent performance of all aspects of the business. You also need capable people in key management positions who know how to keep their part of the business performing as needed – shop manager, install manager, operations manager, etc.
So, the best way to influence your multiple at sale is to set your business up to consistently perform without your constant input.
Other things that influence the value of your business are:
1) Are things neat and organized in your office and your shop? If you were going to sell a car, you’d likely want to clean it up before you showed it to a prospective buyer, right? The same is true of your business. If your shop is so messy that you hate to take customers in there to show off what your team does, then a prospective Buyer isn’t likely to be impressed either.
2) Your competitive advantage compared to your competition. Why would someone want to buy your business as opposed to any of your competitors? What’s different about your business? Is that difference evident to a prospective buyer? How do you communicate and demonstrate that difference to prospective customers? To get the best multiple for your business, there should be plainly evident factors for why your business is a better purchase than your competitor would be.
Another thing to keep in mind as you consider preparing your business for sale is the documentation required for a broker to value your business. This documentation is also needed by the prospective buyer to help substantiate the performance of your business.
This documentation includes monthly profit and loss statements, monthly balance sheets, tax returns, any joint ownership agreements (if you have one or more partners), lease agreements, any loan or mortgage documents, and more. Typically, a minimum of 3 years of documentation is required and 5 years is even better.
This brings up an issue: As business owners, we like to take advantage of legal and practical ways to reduce profit so we can reduce our tax burden. The problem is this reduced profit can impact the valuation of a business when it is put up for sale. If you are considering selling your business in the next 5 years or so, now is the time to talk to your CPA about how to balance the tax burden with your need to show a strong value for your business. So, some advance planning is definitely recommended if you are thinking about selling in the next few years.
As you can probably tell, selling a business is much more complicated than selling a car or a house. For the best results, you need to have a plan several years before you actually list your business for sale. A certified business broker can help you develop that plan.
Pro tip: Buyers are typically more educated about the purchase process than sellers. Now is the time to level that playing field by educating yourself on this process. Look for a series of podcasts on this topic on the Fabricators Coach podcast – available soon on all the major podcast platforms.
If you need a hand preparing your business for sale, email Ed at Ed@FabricatorsCoach.com and he’ll be happy to help out. You deserve to have a business that makes you money, but also allows you time to enjoy it.
If you want to talk with a licensed broker who grew up in the stone business, contact Chase Busenbark at Email: firstname.lastname@example.org or phone: 573-664-0002
This article was published in the December 2023 Issue of the Slippery Rock Gazette, find it at: