When I first meet potential sellers I never ask them if they want to sell their business until I do a valuation for them. How can I sit there and ask someone to sell when I know that most business owners have no real idea what their business is worth.
A few months ago I went to see a gentleman and when the topic of valuation came up he told me, “I know exactly how much my business is worth” I said “that’s good, how much?” he then proceeds to tell me that his business is worth $9 million dollars as he knew it was based on a multiplier of the revenues and since he had sold an average of $500K in the last few years, times an 18 time multiplier his business was worth $9M
Right after I recovered I asked him where he got this 18 time multiplier from and he told me he has heard about a company like his in Wall St. that was sold at an 18 time multiple. I told him that most companies being sold or merged in Wall ST. are large companies with 100s of employees and Millions of dollars in sales. And for that large a multiple it is hundreds on millions. He said “yeah, they had sold $900M that year but it’s the same type of company”
Needless to say this gentleman is not selling his business as I explained to him that the multiples are much, much lower when you have 5 employees and you sell under a million dollars. Actually, the multiplier is applied to your discretionary income and not your sales. Only very large companies sell at a multiple of their sales.
The multiple is much lower and it is affected by the net profits of your business, the size of your company and on the industry your business is in.
Now to the top 3 tips:
1.) Good records – Having good books and records is very important to identify where the expenses and profits are.
2.) Inventory – Inventory can and will kill a business. Having too much inventory hurts you as it does not really affect the bottom line your valuation.
3.) Perks – Most business owners are about lifestyle, so we need to identify what the business is paying for that is not a business expense.
This last tip is the crucial one. Most folks in small business are looking to avoid taxes. They never think of the larger picture; so they have their spouses on payroll without working for the company. They pay their cars, meals, vacations and all kinds of other “expenses” from their business. This is all good until you need a loan if you want to grow your business or when it’s time to sell…