Part #3: Reaching a Deal
Soon a buyer will come knocking at your door. Are you ready?
Reaching an agreement requires plenty of preparation on your part. Thankfully, that business broker you've hired will do much of the work to get your business deal-ready. Nonetheless, follow this primer to make sure all of it is being done.
A business valuation is a professional review of your operation to assess its market value. Similar to a real estate assessment, a Chartered Business Valuator will consider a number of factors to determine the worth of your company, including earnings, competitive forces, market demand, assets and cash flow.
Know your multiplier
Your business will likely be valuated primarily on its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Many experts consider this number to reflect the true earning power of an enterprise. The valuator will take this number and use a multiplier to determine the market value of your business.
- For example, if your EBITDA is $250,000 and your multiplier is 3, your business is worth $750,000.
As the business valuator should explain, the multiplier is based on a number of influencers. There could be peak demand for your particular type of business, which could raise the multiplier. Or, your business may not be as turnkey as possible (see transferrable assets, in the last article) which has the effect of reducing saleability.
How long can you stay?
Just because the business is sold doesn't mean you get to leave. The buyer will likely want you to remain with the company as a management consultant for a period of time post-sale. Your continued presence accomplishes two objectives for the buyer: they can receive training for their incoming management team on running your former business, and your continued presence reassures them they aren't buying a lemon (otherwise you might take the money and run).
Accept the fact you may be there for a while, albeit in a less-demanding advisory role. Determine how much time you are willing to negotiate: 6 to 24 months is common. The good news? You'll be paid for your time, so figure out how much you want to charge for your services and negotiate that into the purchase agreement.
While the broker (or Mergers and Acquisitions firm) will do all of the heavy lifting to see your deal through to completion, you will nonetheless find this period of your life to be very stressful.
The prospective buyer will keep you and your team jumping with requests for information as they conduct their due diligence process and investigate the inner workings of your business. Then, the buyer may produce reasons to lower the asking price and negotiate a discount with your people. That process ends with a mountain of paperwork as you sign over shares and transfer the business. It's not hard to see how it can take three months or longer to successfully close a deal.
So do your best to keep your cool. Don't feel rushed to make decisions along the way; instead, take the time to carefully think through every item presented to you. Listen to the advice of the professionals advising you (lawyer, accountant, financial planner, business valuator and broker). And, above all else, pay attention to your physical and mental stress by taking breaks, exercising and spending time with friends and family.
Take comfort in the fact that thousands of businesses are sold every day. It's a complicated process, yes, but one that other business owners seem to somehow manage to endure. If they can do it, so can you.
Roger Pierce is one of Canada's top small business experts. He takes what he's learned from starting and running 12 small businesses and shares it with thousands of entrepreneurs worldwide in articles, blogs, videos and presentations. He's also co-author of the book, Thriving Solo: How to Grow a Successful Business.