Author: Steff O’Brien
It’s every entrepreneur’s dream, to build a business that runs without them. A saleable business is one that gives you freedom. That freedom can be selling your business, passing it on to family or employees or simply removing yourself from day to day operations. Exit planning (selling) or succession planning (replacing yourself) are two key components of removing yourself from the business. By creating a business that runs without it will be attractive to not just those in your industry, by it will also be attractive to investors. More on that later…
Before we get started, ask yourself the following questions:
– What date will the day to day operations run without you?
– What date will the business run without you?
– What will the profits and the revenues be on that date?
– What will the business be worth on that date?
What is succession planning? Succession planning is a process for identifying, recruiting, training and mentoring high-performing employees with leadership potential; preparing them to step into senior or executive positions when vacancies occur. Note, this can and should include external recruitment; finding the right people to fill key roles.
Why is it important? A comprehensive succession plan ensures a company can continue to run smoothly during planned, or unplanned, leadership changes. Not only that, but succession planes, if executed effectively, can increase the value of your business, minimize risk, and secure the future you’ve worked so hard for.
Key points to a successful succession plan include:
#1 Assessing current and future needs, based on the company’s strategic plan and the goals of priority programs or projects.
#2 Identifying employees whose skills, talents and potential will best help the company meet its needs.
#3 Developing plans to manage any gaps in skills or capabilities that could occur if a key leader or leaders were to leave the company.
(Note: focus on all key positions, not just the most senior managers or executives.)
Keep in mind that exiting a business is a process, not an event, and the right opportunity can come up on you unexpectedly. By being proactive and prioritizing a succession plan, you will be ready to take advantage when the moment strikes!
What is the Best Exit Strategy?: Preparing the business to sell in the open market.
The open market will generate the best sales price. It’s also the most demanding strategy and covers the most bases. Should you ever wish to transition the business to the management team, the employees or a member of the family, most of the work will already be in place.
THE HARD FACTS :
1. 80% of businesses never sell!
2. Nationally, the average business sells for around 0.6 times its annual revenue!
Valuation Tools: A business is only worth what the market is willing to pay for it.
Tried & true factors that go into a successful valuation:
- the business’s revenue & profits
- operational structure
- years in business
- supporting technology
- growth opportunities
- the current buyer pool
How is a company valued?: Professional valuators typically use a mix of three methods to confirm the value of a business.
#1 Income-based approach calculating a multiple of EBITDA
#2 Assets-based approach calculating the value of tangible and intangible assets
#3 Market-based approach checking what comparable companies sold for
#1 INCOME-BASED APPROACH
How do you value a business based on EBITDA?
- industry + location
- market conditions
- sales trends
- multiples used by comparable businesses
- workforce engagement
- size + maturity of company
- past + forecasted earnings and cash flow stability
- customer + supplier diversification
- goodwill + intellectual property
- dependence on owners + key employees
The multiples vary by industry and could be in the range of three to six times EBITDA for a small to medium sized business. Other factors include: goodwill, intellectual property and the company’s location.
#2 ASSETS-BASED APPROACH
How do you value a business based on profit?
#1 Work out the business’ average net profit for the past three years.
#2 Work out the expected ROI by dividing the business’ expected profit by its cost and turning it into a percentage.
#3 Divide the business’ average net profit by the ROI and multiply it by 100.
How do you value a business based on Multiple of Earnings?
The Multiples of Discretionary Earnings method establishes the business value by multiplying the seller’s discretionary cash flow by a composite valuation multiple which is derived from a number of business, industry, market, and owner preferences factors.
A buyer isn’t buying what the business earned in the past, but what it will earn in the future. Historic results provide guidance, but they aren’t necessarily indicative of future results.
Calculate the value of your small business with this helpful tool: Bizex Business Valuation Tool
#3 MARKET-BASED APPROACH
A marketing package will need to be prepared to be reviewed by potential buyers to help them decide if they are interested in your business. There are two types of marketing packages: CBR and CIM. Both will be presented to a potential buyer after they have signed an NDA.
The Confidential Business Review (CBR)
- a 15-25 page business profile
- ideal for main-street business sales, with an appropriate marketing budget
- gives an overview of information uncovered during the valuation phase, such as: value drivers, risk factors and synergies
The Confidential Information Memorandum (CIM)
- ~ 50 page document
- includes 4 broad sections: key highlights, the detailed narrative of your business, growth opportunities and the financial performance
- The CIM is the most important document you will put together for your business, for more detailed information click here
Both the CBR and CIM are to be prepared by a business broker, you are going to want to do your research and find the best advisor who understands your niche and industry. This is crucial for the success of your marketing plan, as they will be able to give you an accurate valuation, produce professionally designed marketing materials and most importantly, tap into their network of ready-to-go buyers.
For more information, click here for some great resources provided from the BDC.
There is a lot, and we mean a lot, of work that goes into the sale of a business. In order to sell your business for the best price, and protect your interests after the sale is complete, it is imperative to utilize a business attorney to review all legal paperwork. Action Edge can help you with this, and with making your business saleable.
Want to make your business saleable? Book a 20 min complimentary coaching session here.