Succession Planning Question 3: How much is your business worth?
After getting in touch with your personal vision for yourself and your business, you’ve decided that, at the appropriate time, you will sell your business. The big questions then become: How do I value the business? How much will I make on the sale? The answers depend on how much value a potential buyer sees in your shop.
You’ve probably heard or read about a business being sold for a certain multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization.) Depending on the size and nature of your business the multiple could range from three to ten times earnings. Typically, the larger the business, the greater the multiple.
Based on that concept, you might look at your shop and figure that if your annual earnings are about $1 million your business is worth $3 million. If this is true, will you walk away with $3 million? Fact is, there are a number of other factors to consider before you start spending the money.
- Taxes: The way you structure the sale can have a major impact on your tax liability. Is it an asset sale? A stock sale? A buyout over time or a one-time transaction?
- Debt: How much does the business owe in short and long term debt? The value of your business will be reduced by the amount of outstanding debt at the time you transfer ownership.
- Working capital: The equation for working capital is current assets minus current liabilities and savings. This amount of the company’s value can fluctuate over time, so you need to keep a sharp eye on these figures.
Other issues that affect the worth of your business are expenses that add no value in the eyes of a prospective buyer, such as club memberships, a luxury suite for sporting events or other perks. You may also have your spouse on the payroll for tax and 401K contributions purposes. Freeing your business from these burdens presents a truer picture of value.
Yet another issue that impacts a buyer’s perception of the value of your company is how dependent the business is upon your personal relationships with customers, suppliers, sales representatives and others. If you’ve built a strong team to whom you’ve appropriately delegated responsibilities and authority, a buyer will see greater value than if you’re a one-person-band who micro-manages every phase of the business.
Which brings us to the most important asset in your shop: Your people. Retaining good employees is critical to realizing the greatest value when you sell the business. So how do you keep them on board and engaged? That’s the subject of our next installment.
Succession Planning 4: How To Retain Key Employees to Protect the Value of Your Shop