Around the Web: A Week in Summary
A recent article from Axial entitled “How to Manage Unrealistic Valuation Expectations from Sellers,” explores the reasons a seller may have unrealistic expectations as well as multiple ways to approach this obstacle as an advisor.
Whether the seller wants to maintain their currently lifestyle, is emotionally attached to the business and therefor inflates it value, or comes up with their number based on stories they’ve heard about friends selling their business, it’s evident that more often than not, most business owners are not experts on selling a business. Therefore, according to experts in the industry, it is important to help your clients come to terms with a more realistic valuation. And there are a few different approaches you can take to achieve this goal.
A recent article from New York Business Brokerage entitled “A Seller’s Guide to Different Types of Buyers for Your Business” outlines the categories of buyers on the market and explains the different motivations of and prominent effects on your business that each type of buyer is likely to have.
Generally, potential buyers will fall into one of two categories: Strategic or Financial. A Strategic buyer’s main motivation is to maximize their profitability and potential growth. They may purchase your business because it adds to their current list of goods or services offered, to acquire your business process or suppliers and customer lists, or even to use the good or services you offer to exclusively increase their business potential.
A financial buyer however is looking to make a profit through investing in your business. This could be in the form of a private equity firm, family office, search fund, holding company or a current employee. The type of financial buyer that purchases your business determines their level of activity in operations and the type of funding they provide.
A recent article from Forbes entitled “To Gain Top Dollar for Your Private Business, Focus on Maximizing Its EBITDA, Not Its Multiple,” explains why, while multiple is important, EBITDA is exponentially more impactful in determining the value of your business and how to use this in your favor.
Even though the multiple is an important figure in determining the value of a business on the market, it is a figure that is relative to the market and is therefore a figure that the business owner has no control over. In regards to EBITDA however, a business owner could apply the following changes and in effect drive up the value of EBITDA:
- Reduce the personal expenses that run through the business’s income statement.
- Get your financials audited.
- Discuss post-EBITDA bonuses that are typically paid to management and family before the sale.
- Eliminate any personal perks that you’ve become accustomed to the business paying for.
- Document nonrecurring expenses.
- Invest in a Quality of Earnings reports, prepared by a reputable firm.
In the same way that a homeowner primps his yard before listing his home, a business owner should proactively improve their ‘curb appeal’. These small steps tidy things up and make the value of your business easier to see for a prospective buyer and drive up the overall value of your business in a sale.