Empire Business Solutions, a leading independent Business Broker in Los Angeles County and Orange County.
Online PR News – 06-November-2019 – Orange County – Empire Business Solutions, a leading independent Business Broker in Los Angeles County and Orange County has been involved in business for sale in Orange County for over 16 years with over 90 transaction under our belt. Roy Moss, President of Empire, says "Selling a business your business can be a major and sometimes life changing event. Owners are often do not know where to start and I will advise the first step is to find the value of their business before deciding to sell."
WHAT'S THE BUSINESS WORTH?
The first thing you to do before you sell your business is to find out what the business may be worth if you put it on the market. A valuation is not about what it's worth in the current owner's hands; it's about the company's transferrable value. Truthfully, it doesn't matter what your accountant, attorney, friend or lover thinks the business is worth, only the market (willing buyer, willing seller) can provide the correct answer. There is of course a way to at least start with a defensible estimate of value. You can get a Certified Business Appraiser to do a valuation, but it will be costly. An experience M&A advisor or seasoned Business Broker can do a Broker Opinion of Value (BOV) to give you a reasonable estimate of the most probably selling price (MPSP) for your business at far less cost. Here are the advantages of an appraisal or BOV: 1. Is the value high enough? Let's face it, we all believe in sweat equity, but it doesn't exist in a sale. An appraisal provides an informed opinion about the business value, so a seller can decide if the asking price will be enough to move on from the business. 2. It provides confidence that the decision to sell is sound with family and partners. 3. You can see the business from a neutral, 3rd party perspective, which is how a buyer and lender will see it. 4. It puts less strain on a transaction. There are obviously many deal points between the buyer, seller and lender in a transaction and since price is normally the biggest, a valuation can reduce tension and allow more focus on the terms and conditions of a deal. 5. Shows preparation and forethought. As noted, buyers have literally millions of choices when buying a business and most of those businesses are not properly packaged for sale. A business valuation shows a buyer you are a serious seller and not simply "testing the market". 6. Saves time and money. Wouldn't you rather know now? There is cost and time required to get an appraisal, but the advantages far outweigh not getting this done. So, the question becomes, how do you get an appraisal and just how painful is the process? Probably not a bad as you think… here are a few tips: Manage your expectations. Be transparent. Put emotions aside. Look for experience. First, make sure your records are in order. You simply can't sell (or even appraise) with poor records. Make sure your business tax returns are not extended, that any professionally prepared records (such as tax returns) are reconciled with your in-house system and your accounting system is up to date. Good financial records reduce the chances for a buyer to work the price down during due diligence. If you want to get a Certified Appraisal, use someone who is independent. If you want to get a BOV, look for a Broker who has many years of experience and is well versed in providing a Broker Opinion. Most experts agree that the starting point for valuing a business is to normalize or recast your business' earnings to get to a Seller Discretionary Earnings (SDE) or adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
Simply stated, SDE is:
Net profit (before tax) plus
Non-cash expense (such as depreciation and amortization) plus
Owner perks (such as salary, benefits and travel) plus/minus
Extraordinary expense (rent adjustments and expenses that are one time or non-recurring), which equals;
Seller's Discretionary Earnings
Critical Factor - if you remember nothing else from this document, remember SDE or EBITDA - It will be the reason the business does or does not sell!
Once you know the SDE, simply multiply it by something between 1 and 3.5 and voila, you have a value. End of story, right? Unfortunately, no… go to market using a simple multiple and buyers, their lenders and advisors will tear you apart. Does that multiple include inventory? What does it include? Where did you get it? Why that one? How many other businesses like yours were studied to obtain the multiple? Can we see those comps? Get the picture? It's what happens when you value a business with math a 10-year old can do in their head.
At a minimum, you need to test your multiple for reasonableness, which is also quite simple. Here's a quick formula:
- Annual debt service
- Debt service cushion
- Capital expenditures
- A new owner salary
= what's left for the buyer.
If, after paying the note, buying new equipment when needed and taking a livable wage, a reasonable return on investment remains; a legitimate chance to sell comes into light. Bottom line, rules of thumb are at best "shorthand" business values.
Another metric used in valuations is EBITDA, and is commonly used by Private Equity Groups (PEG) and sophisticated buyers.
EBITDA (adjusted): Earnings Before Interest, Taxes, Depreciation and Amortization where the EBITDA is adjusted for unusual expenses, personal expenses, and compensation (such as a manager's salary) to align with market-based benefits and compensation required to operate the business.
Companies are usually valued at 3-6 times EBITDA or 1-3 times SDE. These are factors, in no particular order, are widely accepted to have a substantial impact on the multiple of SDE or EBITDA.
1. EBITDA Size
2. Revenue trend
3. Profit Margins
4. Customer Concentration
5. Industry Concentration
6. Strength of Management
7. Competitive Advantage.
Now that you have an idea of the value of our business, you can make a decision to sell or keep it. If you want more information on selling your business, go to www.empireoc.com and download our 40 page guide on How to Sell Your Business.
Contact Roy Moss, President of Empire Business Solutions at 714-374-6430 to discuss the process in selling or buying a business in Orange County. Empire has been in business since 2004 and is considered a leading California business broker with offices in Orange County and Los Angeles with primary emphasis on businesses in the $1.0 mil-$10.0 mil revenue range.