After selling my logistics company in 2012 and my e-commerce company in early 2014, I've had some time to reflect in how differently each sold. My notes from both sales created the list of seven things every entrepreneur must cover well before selling your business.
First, I want to give you a short summary of the two sales I went through over the last few years. I elected to sell my logistics company myself and avoided private equity (PE) firms, investment bankers, and business brokers. Simply by posting my business online and getting the word out within my 20 year old transportation Rolodex, the best outcome was right down the hall as I ended up selling it to my terminal manager. The negotiations were clean and concise and lasted less than a week, only one business attorney was involved, papers were signed and the deal was done. From start to finish, the sale was complete in less than 90 days.
The second time around, I hired an investment banker, put months into a CIM (confidential information memorandum) document, worked on a list a mile long of potential buyers - from PE firms to fortune 500 companies, and did multiple dog & pony shows in front of interested buyers. In the end, we got a handful of non-binding bids that all ended in disappointment for various reasons. One year later, I sold out my shares to my minority business partner.
Each of these experiences produced a plethora of new found knowledge in an area I thought I knew pretty well through a few of my past experiences, books I've read, and colleagues I knew in the M&A arena. Let's just say I had no idea! I am grateful for both experiences, what I learned, and my desire to share them with other entrepreneurs.
With the startling number of start-ups sprouting up everyday, it is critical to have the end in mind. The "end" is an exit strategy under your terms and within the parameters you set that triggers the start of an exit. It is healthy to think through possible exits once your business is financially stable and has a strong operational foundation. The following are seven things you must get in order and optimally presented before putting your business up for sale. Knowing this simple outline will help you set up your company for securing the best multiple of EBITDA to all potential buyers that show interest in your business.
#1: Your Financial Statements must be in order from day one. As an entrepreneur, you do not want any holes in your historical financials. Get with your CPA or Controller and put together the following critical financial statements:
#2: Estimate the Value of Your Business Assets. It’s essential to list and price all physical assets of your business, including furnishings, fixtures, equipment and inventory. In my simple transaction, this was done down to every piece of furniture, computers, and office supplies. With the overwhelming approach in my e-commerce business, this was overlooked by both sides and became a mess a few months after we closed.
Tangible Assets – The worth of these items is important for buyers who require you to provide a complete asset list, including purchase prices and fair market values. The worth of these assets is also very important in determining whether or not you should liquidate these assets before the sale.
#3: Prepare Your Statement of Seller’s Discretionary Earnings. Work with your accountant or bookkeeper to "recast" or "stabilize" your business income statement into what’s interchangeably called a statement of owner’s cash flow or a statement of seller’s discretionary earnings (SDE). Public companies and middle market businesses are valued as a multiple of EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization. However, smaller businesses are valued as a multiple of Seller's Discretionary Earnings (SDE), which can be defined as EBITDA + Owner's Compensation AND owner perks (bonuses, company car, and other special perks the owner did for her or himself. Therefore, SDE is typically the net income (or net loss) on the company tax return + interest expense + depreciation expense + amortization expense + the current owner's salary + owner perks.
#4: Estimate the Earnings Multiple That’s Likely to Apply When Pricing Your Business. Most owners receive somewhere between one and four times the annual SDE of their business, with the multiple pegged to the attractiveness of the business being purchased. Go into this with defined expectations of what you are wanting to see regarding the SDE multiple.
#5: Do the Math to Arrive at an Early Estimate of Your Purchase Price. Based on how attractive your business appears in key areas that most affect its future success under new ownership, you can multiply your annual SDE by your estimated earnings multiplier to arrive at a preliminary estimation of your business purchase price.
#6: Price Check! After arriving at your estimated purchase price, conduct the following research: 1) Search every online businesses for sale marketplace to research similar listings and sales in your business category, market area, and price range.; 2) Gain insights into selling prices of comparable businesses.; 3) Work with your sales agent (investment banker, broker/consultant, or adviser) to see how your pricing lines up with the prices of comparable businesses that have sold over the last 24 months. Look for trends - both up and down.
#7: Research. Research. Research. You simply cannot do enough research before and during the process of getting your business ready to sell. Whoever you partner with the assist in the sale or you decide to put it on the market yourself, it is critical that you do your homework so none of the many wool blankets that are out there get pulled over your head! Good investment bankers will shoot straight but are very good at dampering your expectations, throwing out multiples that are sometimes in left field, and discounting parts of your business or intellectual property that might increase your multiple significantly. Research other business like yours and determine: who the buyers were and where they came from (industry, PE's, etc.), what multiple range over the last 24 months, and who else is for sale that might create a blind-side competition.
Looking back, my simple and somewhat naive approach with selling my logistics company ended up being the best approach in a lot of ways. From being much less stressful to hitting my target sale price. However, the second time around I learned a lot in a much bigger arena. Have fun through the process and stay engaged. It just might be a life changing event that opens many new doors to choose from! Good luck.
Scott E McGlon is the President of McGlon Properties, LLC and the author of many blog post on MP Blog. He has been a serial entrepreneur, investor, and president of many successful start-ups since 1998.
MP, LLC credits blog post with the original author and links (if available).
Scott E McGlon is the President of McGlon Properties, LLC and the author of many blog posts on MP Blog. He has been a serial entrepreneur, entrepreneur-in-residence, investor, and president/CEO of many successful start-ups since 1998.
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