October 21, 2019
When we talk to business owners and ask what the selling price is of their business, we hear all kinds of crazy formulas and justifications.
Selling a business is a daunting task filled with lots of hard work and time requirements. The owner should be focused on running and growing the business and will certainly look smart to buyers when they retain outside experts to help them sell their business. It shows buyers you know you are not an expert in everything and are willing to reinvest back into the business to get a desired result.
The fact is, no serious, qualified buyer is going to spend his or her time on a business that has not normalized its financials, created a seller’s memorandum at the minimum, and painted a picture of where the business could be. As well, most buyers will base the value of your business on a number of items but the EBITA is likely number one.
You also want to list the assets separately from the business sale price especially if there is real estate involved.
Buyers Buy the Future.
You must know your EBITA (earnings before interest, tax & amortization) and the more you package or stage the business the more you will get for it! Period. Fact.
What’s a Selling Memorandum? Let’s dig in:
You will also need to include accurate financial information, including sales figures, cash flow, the value of your assets, profit margin, and how the numbers have changed over the years. This can take the form of charts or graphs, or a combination. Finally, you can include your asking price.
The selling memorandum should be as brief as possible but fully outline the business - where it has been and where it could be in the future. If your business has had difficulties or deficiencies in an area, address these areas and how you overcame your shortcomings or include information on how the new owner can avoid or, better, solve similar problems. Trying to disguise business problems is never a good idea; rather, confront these challenges head on in your memorandum. Your deficiencies can be an opportunity for the right buyer.
Leave out highly confidential information and make sure an NDA (non disclosure agreement) is signed before giving it out to anyone. Also include a “forward looking statement” which states the selling memorandum does not constitute any type of agreement but is a sales and marketing tool only. Still, it deserves a careful execution and the input of your business advisers.
If the above is not prepared or buyers have no real value calculation, it is a waste of everyone’s time to put the business up for sale.
We often can receive 30-40 real bids for a business and offers vary greatly. The bids will vary, and the highest bid can be twice the value of the lowest one. Again, beauty is in the eye of the beholder.
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Michelle James is a Business Consultant for Venture Business Solution.
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