Executive Suite: What Is Your Business Worth?

Last month we discussed the perils of turning a business over the next generation. It was a cautionary article, and likely left a number of our readers wondering what their businesses would be worth were they to sell it.

Multiples

Businesses are valued on the basis of multiples of profit before taxes. The exact multiple will vary based on the type of business and the location.  A business in New York will get more than one in the rurals of South Carolina—everything costs more in New York.  You can get a pretty good idea of what the going multiple in your area is through your local print association. It is not classified information.

Secondary Factors

There are other factors, but they are secondary. Among them are the business’ direction.  Are sales heading upward, remaining stable, or declining? The direction will have more to do with how many people will be interesting in buying your business than how much they will pay

How long has the business been in existence? Established business are much more attractive than those a year or two old?  How long have you owned it?  Again, stability has value.

Are their key employees and if so, will they stay? This is often a dealbreaker. Buyers do not want to give the clients the impression that things have changed due to new ownership—that ABC Printing is only the same in name.  Big change means loss of clients. One way to keep a stable front is to have the “face” of the business—the visible people—remain unchanged.

How long will you stay on to effect a smooth transition?  That may not be more than 30 days. During that transition it is wise to tell your clients you have taken on a new “partner,” rather than that you sold the business. After a smooth month or two the clients will not feel any great concerns.

Buyers Buy on Numbers

Buyers do not pay based on the past or the future. They may buy on potential but they will pay on what is right now. One of the most common things I hear from sellers of declining businesses is, “You know, Dr. David, with the right guy in charge this business could be doubled or tripled.” The unspoken message under that statement is “therefore that should be include in the price.” 

Methinks not. The first thing a buyer will say in response is, “If it could be doubled or tripled, why doesn’t the seller do it and he won’t have to sell it. Besides, even if it is, I am not buying on the come.  Let’s see where it is now.”

Documentation

Buyers will only pay on the basis or provable numbers.  Why is that important?  So many businesses take in a lot of cash, and not all of it may get reported. How much is reported is the seller’s business, but how much is documented is the buyer’s concern. It doesn’t matter how it is done, but you need to track every buck that comes in so when it comes to selling you demonstrate to a buyer’s satisfaction the real income of the business.

Be as honest as you can in showing your financials. An honest error here or there is forgivable, but if the books are manipulated, the buyer will figure that out in due diligence. When he does you will have credibility of Eliot Spitzer and that will be that.

Final Thoughts

If your business is on the decline, consider getting out. The sky is turning dark and buyers are no more interested in buying losers than fans are paying to watch losing teams. Don’t panic, but keep your head above the sand and look soberly at the situation.

On the positive side, businesses usually sell based on the relationship between the buyer and the seller. If the two like and trust one another a deal is usually reached. There may be some speedbumps, but the buyer wants to buy from that seller, and the seller want to sell to that buyer, and usually they will find a way to smooth the ruffles.