Will this be the year you seriously drive up the value of your company?
If you have resolved to make your company more valuable in 2018, you may want to think hard about how your customers pay.
If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Seller's Discretionary Earnings (SDE).
If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect a higher multiple. Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.
Not sure how to create recurring revenue? Here are five models to consider:
Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.
This process of adjusting—and how you defend these adjustments to a buyer—is where you can dramatically spike your company’s value.
Let’s take a simple example to illustrate:
Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business for $100,000 per year. You could safely make the case to a buyer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you three times profit for your business, that one adjustment has the potential to earn you an extra $300,000.
You should be a ...
WHY IT MATTERS
When making decisions about buying or selling a business, the business owner or seller needs someone with in-depth knowledge and expertise working with them to help guide the process.
A Business broker can provide expertise in all aspects of selling or buying a business, knows the legislation and documentation required to protect the seller and the buyer, and appreciate the emotional element that's always present with these types of life changing decisions.
A Business broker is an expert in developing business valuations, understanding the industry and getting the best deal in the shortest amount of time.
WHY IT PAYS TO USE A BUSINESS BROKER
Selling a business on your own means having to run the business while dealing with all aspects of selling: valuing the business (65% of business owners don't know how much their business is worth), keeping it confidential, marketing, structuring the deal, financing, preparing documents, negotiating, timing, dealing w ...
YOUR COMPANY IS PROBABLY YOUR LARGEST ASSET
If you are a business owner who is also the operator, you are among a large percentage of business owners whocan relate. With the amount of responsibility that you carry comes a tremendous amount of stress. If you are experiencing burnout as a result, this could have a negative impact on your business. If you can't enjoy that much deserved vacation, even though you have a reliable productive staff, and feel you must continue to manage while away, this could be your burnout interefering with your ability to destress and take advantage of your absence.
1. Stop minimizing taxes; instead maximize reported profitability
Many small businesses utilize the cash-basis of accounting rather than the accrual basis. Doing so enables businesses to accelerate expenses into the current tax year and defer revenues to the following tax year. This is a very aggressive method of minimizing taxes, and it follows that this method minimizes earnings and unfortunately minimizes business valuations.
2. Eliminate excessive personal expenses and skimming cash
Similarly, if you run personal expenses through your business to minimize taxes, that practice is counterproductive to the value of your business. Although some of those expenses might be able to be “sold” as add-backs to arrive at seller’s discretionary earnings (SDE), buyers often fight those adjustments and lenders will not consider them at all in determining the value of the business
3. Stop expensing capital expenditures
There are a number of ways that the sale of a business can be structured.100% all cash deals are rare.In most cases, deals are created where a combination of cash, financing, stock, and/or earn-outs are used.The key to any structure is ensuring that it protects your financial legacy and is set up so that you are able to close an optimal deal with a premium buyer.