Not Having This Can Ruin the Sale of Your Business
May 24, 2024When entrepreneurs think of selling their business, they often imagine the freedom that comes with cashing out and moving onto their next venture. However, as Shannon discusses in the latest episode of "Keep What You Earn," getting to that point requires a deep understanding of your business's financial health and its worth in the market. This knowledge isn't just advantageous—it's crucial for securing a deal that truly reflects the value of your entrepreneurial effort.
#### The Importance of Solid Financials
First and foremost, Shannon emphasizes the critical role of having solid financials. It’s not uncommon for business owners to view financial statements and bookkeeping as mere necessities for tax purposes and routine operations. However, these records are instrumental in painting a clear picture of a business’s health and its potential growth trajectory. When the time comes to sell, these documents transform into tools that can leverage a better deal or even determine the feasibility of a sale.
For business owners, understanding the numbers goes beyond knowing what you earn annually. Shannon pointed out a compelling scenario: if your business earns a million dollars annually, selling it for the same amount means you're essentially giving away all future profits for a single year's revenue—clearly not a great deal. Thus, comprehending these figures helps in evaluating offers and in understanding the real earning potential of your business, not just its current standing.
#### Valuation Metrics: More Than Just Numbers
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a term that might sound intimidating but is essentially a snapshot of a company's operational efficiency and profitability. Knowing your EBITDA and how it compares to similar businesses in your industry can provide a benchmark and help you ascertain whether an offer is competitive. If your industry averages a certain multiplier for EBITDA upon sales, having this knowledge arms you with the power to negotiate or refuse an offer based on solid data.
For instance, if the industry standard is a four times multiplier on EBITDA, and your business’s EBITDA is $100,000, you should be looking at offers around $400,000 as a baseline. Anything significantly lower means either your business is undervalued, or perhaps additional factors need to be considered which might be affecting your business's valuation negatively.
#### The Role of a Fractional CFO
Recognizing every business owner may not be a financial expert, Shannon advocates for partnering with a professional who can make sense of these numbers. A fractional CFO can be a game-changer, offering high-level financial strategy without the commitment of a full-time position. They can ensure your financial records are impeccable, provide clarity on what your business’s financial statements are actually saying, and prepare you for the most advantageous sales transaction.
This kind of partnership can be especially vital when preparing for an exit, as the clearer and more detailed your financial overview, the stronger your position in negotiations. This isn't just about getting any price; it’s about getting the right price, one that truly reflects the value of what you've built.
#### When and How to Sell
Timing is another critical component discussed in the episode. Even with all the numbers lined up and a fair valuation in hand, understanding when to sell can affect the ultimate success of the deal. The business cycle, market conditions, and personal readiness all play into deciding whether to sell now or perhaps improve certain aspects of your business to fetch a better price later.
The decision to sell one's business is highly personal and financial clarity can ease this process, making it less overwhelming. Having confidence in your financial position means you have the facts to back up your decisions, which can be empowering for any business owner looking forward to their next chapter.
In conclusion, as Shannon highlights, preparing to sell your business is not just about sprucing up your operations for a potential buyer. It’s about deeply understanding your financials, recognizing your business's worth, and entering the market armed with the right information and the right help. This prep work doesn't just aid in getting a fair price—it ensures that you truly Keep What You Earn.
What you'll hear in this episode:
04:43 Know your business's worth before selling.
07:34 Consider timing and financials for successful business exit.
If you like this episode, check out:
Stop Trying to Scale Everything
The Steps to Selling a Business
Want to learn more so you can earn more?
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Visit keepwhatyouearncfo.com to work with Shannon and her team
Watch this episode and more here: https://www.youtube.com/channel/UCMlIuZsrllp1Uc_MlhriLvQ
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
