Pay Attention to Seller’s Discretionary Earnings to Maximize Business Valuation!
Pay Attention to Seller’s Discretionary Earnings to Maximize Business Valuation!
If you are a small to medium sized business owner, when it comes to selling your business one of the most important metrics that you should be aware of is known as Seller’s Discretionary Earnings or SDE. SDE refers to the total benefits that an owner receives from owning a business. SDE is important because it is one of the metrics that is used to help establish the value of a business for sale. (in larger companies EBITDA is typically used for valuation).
One of the main ways that a business owner can jeopardize the valuation of their business is by running too many non business-related expenses through the business. While this does reduce taxable profit while the owner is operating the business, it can cause a bank to undervalue the business which could affect a buyer’s ability to finance the purchase.
In addition to a potentially lower valuation, buyers will also wonder if the business is being operated effectively and that could also lead to lower purchase offer valuations.
SDE is based upon Net Income before taxes, Depreciation, Amortization, Interest, one Owner’s Compensation and Other Additions/Deletions which reflect how much salary a Buyer can take plus Tax Capability and Business Debt Carrying Capacity; A higher SDE will normally equate to a higher value or selling price.
If you are considering selling your business in the next 1-4 years you should start thinking about your SDE now so that you can maximize the valuation when it comes time to sell your business.
If you would like to discuss SDE or the sale of your business, please contact me at randy@evobizsales.com for a complimentary consultation.
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How Employees Factor Into the Success Of Selling Your Business
Quality employees are essential for the long-term success and growth of any business. Many entrepreneurs learn this simple fact far too late. Regardless of what kind of business you own, a handful of key employees can either make or break you. Sadly, businesses have been destroyed by employees that don’t care, or even worse, are actually working to undermine the business that employs them. In short, the more you evaluate your employees, the better off you and your business will be.
Forbes’ article “Identifying Key Employees When Buying a Business”, from Richard Parker does a fine job in encouraging entrepreneurs to think more about how their employees impact their businesses and the importance of factoring in employees when considering the purchase of a business.
As Parker states, “One of the most important components when evaluating a business for sale is investigating its employees.” This statement does not only apply to buyers. Of course, with this fact in mind, sellers should take every step possible to build a great team long before a business is placed on the market.
There are many variables to consider when evaluating employees. It is critical, as Parker points out, to determine exactly how much of the work burden the owner of the business is shouldering. If an owner is trying to “do it all, all the time” then buyers must determine who can help shoulder some of the responsibility, as this is key for growth.
In Parker’s view, one of the first steps in the buyer’s due diligence process is to identify key employees. Parker strongly encourages buyers to determine how the business will fair if these employees were to leave or cross over to a competitor. Assessing if an employee is valuable involves more than simply evaluating an employee’s current benefit. Their future value and potential damage they could cause upon leaving are all factors that must be weighed. Parker recommends having a test period where you can evaluate employees and the business before entering into a formal agreement. While this may sound like a good idea, I strongly disagree. It is for the benefit of both the buyer and seller to share with the employees the business has been sold at the time of closing. Employees need to see the new buyer in action showing they have the same pay, benefits, and job responsibilities.
It is key to never forget that your employees help you build your business. The importance of specific employees to any given business varies widely. But sellers should understand what employees are key and why. Additionally, sellers should be able to articulate how key employees can be replaced and even have a plan for doing so. Since savvy buyers will understand the importance of key employees and evaluate them, it is essential that sellers are prepared to have their employees placed under the microscope along with the rest of their business.
Copyright: Business Brokerage Press, Inc.
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Business Buyers Can Leverage SBA Lending
Finding the money to start your own small business can be a challenge. Over the decades, countless people have turned to the Small Business Administration (SBA) for help. A recent Inc. Magazine article, “Kickstart Your Business Dreams with SBA Lending,” by BizBuySell President, Bob House, explored how SBA lending can be used to the buyer’s advantage.
The article covers the basics of an SBA loan and who should try to get one. House notes that the SBA doesn’t provide loans itself, but instead facilitates lending and even micro-lending with a range of partners. The loans are backed by the government, which means that lenders are more willing to offer a loan to an entrepreneur who might not typically qualify for one. The fact is that the SBA will cover 75% of a lender’s loss if the loan goes into default.
Entrepreneurs can benefit tremendously from this program. In some cases, an SBA loan even means skipping the need for collateral. SBA loans can be used for those looking to open a business, expand their existing business or open a franchise.
House points out that getting an SBA loan has much in common with receiving other types of loans. For example, it is necessary to be “bank ready.” By “bank ready,” House means that all of your financial documentation should be organized, clear to understand and ready to go.
Next, a buyer would need to check that he or she qualifies, find a lender and fill out the necessary SBA forms. In order to be eligible for an SBA loan, it is necessary that the business is a for-profit venture and that it will do business in the United States. Once the necessary forms have been submitted, it can take between 2 to 3 months for an application to be processed and potentially approved.
The simple fact is that the SBA helps thousands of people every year. If you are looking to buy a business or expand your current business, then working with the SBA could be exactly what you need. Of course, business brokers are experts on what it takes to buy. Working with a broker stands as one of the single best ways to turn the dream of owning a business into a reality.
A Planning Process for Future Success For Business Owners
Building a successful business likely took you years of deliberate planning. From your initial business plan to now, you’ve built something worth protecting and worthy of pride. When many owners reach the peak of their business success, they wonder where they go from there. Whether you’re approaching, at, or getting farther away from the peak of your success, the answer is likely the same: The next step is planning for the future of your business and your ownership.
The tricky part is making time to do the planning. It may seem like you have years and years to begin planning for future success, but that isn’t always true. Though it may seem impossible to think through all the important considerations that are involved in your ultimate and inevitable separation from your business, doing so is also an opportunity to take as much control over the future as possible.
We believe that the most effective way to position yourself for future success is to begin a three-step process. Each of these steps can help you answer questions about your current ownership, how you picture the rest of your life, and how your decisions can affect people and things you care about.
Determine How Much Money You Need to Become Financially Secure
Do you know how much money you spend each year? How many different perks do you take as the owner of a successful business? How much money would you need—for yourself and anyone who relies on you—to never have to work another day in your life? These are just a few questions you should ask yourself.
If you cannot answer these questions with confidence, it’s difficult to know how much money you need to be financially secure. Financial security is important because it can give you the freedom to do exactly what you want with your future. Whether that means selling your business and retiring; transferring ownership to someone inside the business, like a child or employee; or working through your last breath, working toward financial security gives you and the people who depend on you a cushion if something unexpected were to happen, and confidence if you want or need to separate from the business.
Of course, if everything goes as planned, you can achieve financial security and all the freedoms that go along with it. So, knowing how much you need to be financially secure can be a big win-win situation.
Decide What You Must Do to Reach Your Financial Security Goal
Once you’ve figured out what you need for financial security, you should consider how you’ll get it. Ask yourself whether there’s anything you can do within the business to improve cash flow and profit. Find out whether you’re investing non-business assets in ways that will help you reach your financial security goal. Figure out how you can use the strength of your business—which is likely your largest asset—to pursue financial security.
Determine What’s Important to You
Financial security might be the most important aspect of planning for future success, but it isn’t the only thing. Many business owners focus so much on their financial goals that they forget to think about more intangible goals. For example, if you could guarantee yourself financial security by selling your company to someone who has told you that he will lay off everyone in your company, would you do it? If you wanted to transfer your ownership to a key employee who is exceptionally talented but treats his co-workers poorly, would you do it?
These intangible, or values-based, goals play an important role in your planning for future success. Business owners can easily disregard these goals and come to regret it in the later stages of their planning. Values-based goals matter, and they can affect how you pursue your overall financial goals. That’s why it’s important to consider them early in your planning process.
Making these determinations and decisions isn’t something you must do alone. If you’d like to talk about using a process to plan for your future success, please contact us today.
Ed Cotney
Olympus Tax, Business and Insurance Solutions, Inc.
4600 Roseville Road, Ste 150 / 260
Sacramento, CA 95660
www.olympustax.com
(530) 913-0562
How Employees Factor into the Success of Your Business
Quality employees are essential for the long-term success and growth of any business. Many entrepreneurs learn this simple fact far too late. Regardless of what kind of business you own, a handful of key employees can either make or break you. Sadly, businesses have been destroyed by employees that don’t care, or even worse, are actually working to undermine the business that employs them. In short, the more you evaluate your employees, the better off you and your business will be.
Forbes’ article “Identifying Key Employees When Buying a Business”, from Richard Parker does a fine job in encouraging entrepreneurs to think more about how their employees impact their businesses and the importance of factoring in employees when considering the purchase of a business.
As Parker states, “One of the most important components when evaluating a business for sale is investigating its employees.” This statement does not only apply to buyers. Of course, with this fact in mind, sellers should take every step possible to build a great team long before a business is placed on the market.
There are many variables to consider when evaluating employees. It is critical, as Parker points out, to determine exactly how much of the work burden the owner of the business is shouldering. If an owner is trying to “do it all, all the time” then buyers must determine who can help shoulder some of the responsibility, as this is key for growth.
In Parker’s view, one of the first steps in the buyer’s due diligence process is to identify key employees. Parker strongly encourages buyers to determine how the business will fair if these employees were to leave or cross over to a competitor. Assessing if an employee is valuable involves more than simply evaluating an employee’s current benefit. Their future value and potential damage they could cause upon leaving are all factors that must be weighed. Wisely, Parker recommends having a test period where you can evaluate employees and the business before entering into a formal agreement.
It is key to never forget that your employees help you build your business. The importance of specific employees to any given business varies widely. But sellers should understand what employees are key and why. Additionally, sellers should be able to articulate how key employees can be replaced and even have a plan for doing so. Since, savvy buyers will understand the importance of key employees and evaluate them, it is essential that sellers are prepared to have their employees placed under the microscope along with the rest of their business.
7 Questions To Answer Before Selling Your Business
The first step towards successfully selling a business is finding a qualified business broker to work with. Sellers should also ask themselves an array of important questions. A recent article, “7 Questions to Answer Before Selling Your Business,” published by Good Men Project, has a great overview of questions sellers should answer before moving forward.
Author Troy Lambert believes that at the top of the list is one very simple and powerful question, “Are you ready?” For example, your financial reports should be ready to show.
The second question is, “What’s it worth?” Determining what a business is worth means you’ll need a professional business valuation. A great deal can go into evaluating your business and you need an expert to help you determine that value.
Third, Lambert believes that prospective sellers should ask themselves, “How’s the health of my industry?” He emphasizes that honesty is key here for a variety of reasons. If your industry is in a transition period, for example, then it might be better to wait until a better time to sell.
The fourth question on Lambert’s list is, “How long will it take?” In short, you need to remember that selling a business can take a long time. Successfully selling your business may even mean that you have to stay on and work with the new owner during a transition period.
The fifth key question is, “Who is my buyer?” You don’t want to waste a lot of time with potential buyers who are simply not a good fit. Finding the right buyer for your business helps to ensure that a deal will be finalized.
Sixth, Lambert wants sellers to think about how they will get paid. Are you willing to finance part of the deal? What about balloon payments over time? Understanding, before you put your business on the market how you want to be paid and how flexible you can be in terms of payment is essential.
For most sellers, selling a business will stand as the largest financial decision of their lives. With this realization comes more than a little pressure.
Considering the enormity of the decision, having good advice is simply a must. A seasoned and experienced business broker understands what it takes to buy and sell a business. Working with a business broker is an easy and efficient way to begin the process of selling your business. Brokers know what it takes to successfully sell a business and can help you answer these questions and many more.
Copyright: Business Brokerage Press, Inc.
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7 Big Questions to Ask Yourself Before Moving Forward
The first step towards successfully selling a business is finding a qualified business broker to work with. Sellers should also ask themselves an array of important questions. A recent article, “7 Questions to Answer Before Selling Your Business,” published by Good Men Project, has a great overview of questions sellers should answer before moving forward.
Author Troy Lambert believes that at the top of the list is one very simple and powerful question, “Are you ready?” For example, your financial reports should be ready to show.
The second question is, “What’s it worth?” Determining what a business is worth means you’ll need a professional business valuation. A great deal can go into evaluating your business and you need an expert to help you determine that value.
Third, Lambert believes that prospective sellers should ask themselves, “How’s the health of my industry?” He emphasizes that honesty is key here for a variety of reasons. If your industry is in a transition period, for example, then it might be better to wait until a better time to sell.
The fourth question on Lambert’s list is, “How long will it take?” In short, you need to remember that selling a business can take a long time. Successfully selling your business may even mean that you have to stay on and work with the new owner during a transition period.
The fifth key question is, “Who is my buyer?” You don’t want to waste a lot of time with potential buyers who are simply not a good fit. Finding the right buyer for your business helps to ensure that a deal will be finalized.
Sixth, Lambert wants sellers to think about how they will get paid. Are you willing to finance part of the deal? What about balloon payments over time? Understanding, before you put your business on the market how you want to be paid and how flexible you can be in terms of payment is essential.
For most sellers, selling a business will stand as the largest financial decision of their lives. With this realization comes more than a little pressure.
Considering the enormity of the decision, having good advice is simply a must. A seasoned and experienced business broker understands what it takes to buy and sell a business. Working with a business broker is an easy and efficient way to begin the process of selling your business. Brokers know what it takes to successfully sell a business and can help you answer these questions and many more.
What Happens When You Wait Too Long To Sell Your Business?
What Happens When You Wait Too Long To Sell Your Business?
It can be difficult to walk away from a business that’s turning a profit. But if you’re anywhere near your intended exit date, that may be exactly when you should be putting your company for sale!
Almost every business is destined to cycle through a growth, a maturity, and a decline stage. And the best time to sell is when your company is mature enough to be consistently profitable, and has a proven set of business systems in place.
Too many owners take their foot off the gas when their business reaches the maturity stage. They milk their profits for as long as possible, and then try to sell when revenues are declining.
Buyers, however, are looking for healthy, successful businesses where profits are not only reliable, but are ideally still on the rise. So, if you wait too long to sell your business, there’s a good chance you’ll be forced to choose between dredging up the energy and resources to revitalize its growth – or accepting a much-reduced price.
Working with a broker will help you better understand:
- where your business needs to be performance-wise to be sellable,
- what prospective buyers are typically looking for in a company, and
- the timeline that’s likely to be involved in selling your business
It may feel counterintuitive to sell while your business is still a going concern. But not only will your company be worth a great deal more during its peak earning years, some businesses literally become unsellable once they enter the stage of decline.
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The Historic Levels of Small Businesses Being Sold Drops Slightly
The number of small business transitions continues to be strong for the first quarter of 2019. In fact, despite a small decline, small business transitions remain at historically high levels.
Looking at the Statistics
According to a recent BizBuySell article entitled, “Number of Small Businesses Changing Hands Dips Slightly, But Market Remains Ripe for Buyers and Sellers,” now is still very much the time for both buying and selling a business. It is true that the number of businesses sold in the first three months of 2019 dropped by 6.5% when compared to 2018. Yet, it is important to keep in mind that the number of completed transactions remains very strong. Likewise, inventory is increasing, with a 6.1% increase in listings in Q1 of 2019 when compared to the same period in 2018.
While the market is indeed strong, the BizBuySell article did note that some experts feel that there are signs that the market could become more challenging moving forward. In part, this is due to the prospect that interest rates and financing could become increasingly challenging and more expensive. These factors indicate that now is a smart time to both buy and sell a business.
Likewise, the financials of sold businesses in Q1 remains strong. In fact, the median revenue of sold businesses jumped 6.5% when compared to Q1 2018. Now, the median revenue stands at $540,000. However, cash flow continues to hover around the $100,000 for five years in a row.
What are the Top Regions?
Currently, the top markets by closed small business transition are Miami-Fort Lauderdale-Miami Beach, Los Angeles-Long Beach-Santa Ana, New York-Northern New Jersey-Long Island, Tampa-St. Petersburg-Clearwater and Dallas-Fort Worth-Arlington. The top markets by median sale price are Charlotte-Gastonia-Concord, San Francisco-Oakland-Fremont, Denver-Aurora and Dallas-Fort Worth-Arlington.
A Consistently Strong Market
Overall, the experts at BizBuySell believe that the market remains very strong and active. They believe that the wave of retiring baby boomers looking to exit their businesses, historically low interest rates and the rise of the next generation of entrepreneurs are helping to fuel a great deal of activity.
According to Matt Coletta, Co-Founder and Managing Partner, M&A Business Advisors, “We are seeing more quality businesses coming on the market with good, clean books than I have seen in my 25+ years in the business.”
If you are considering buying or selling a business, then now is an excellent time to jump in. Working with a business broker is a great way to ensure that you find the right business for you at the right price.
