EBITDA and What It Means for Selling Your Business
Selling a business is rarely as straightforward or fast as business owners would like. Unless you’ve sold a business before, there will be unforeseen obstacles. Even if you’ve sold a business before, you will likely run into hurdles along the way. The fact that every business is different, and this impacts the variables associated with the sale of a given business. Market conditions change daily, and that means knowing the current “lay of the land” is of critical importance. All of this underscores the value of working with a business broker or M&A advisor.
A lack of important financial data can be a major problem for business owners looking to exit their business. You can expect any serious buyer to jump in and take a detailed look at your business. Every detail of your EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, will be examined. EBITDA will play a role in calculating the value of your business.
Determining the value of your business via EBITDA uses different approaches and tools such as the Quality of Earnings Analysis Report or Q of E. GAAP accounting is used as the basis for financial reporting and differs substantially from how many businesses deal with their accounting practices. It is a shift that can catch business owners off guard, as the end result can be a dramatic shift in the EBITDA.
Potential buyers will receive many different documents regarding both the operational and financial health of your business. In general, this process is called due diligence. Any serious buyer will invest considerable time and attention to this due diligence process. Therefore, it is vital for business owners to disclose accurate information and provide documentation that will support the EBITDA of the business. Preparing to sell your business is usually a unique event, and it is one that takes considerable planning and knowledge of the process.
EBITDA is typically used as a way to attach value to your business by using a multiple of the EBITDA. It is all but guaranteed that a potential buyer or investor will perform a review of your income statement. That means they will likely figure out an adjusted EBITDA that they feel makes the most sense. In the end, there may be a difference between the buyer and seller on the EBITDA, and this is something that sellers realize going into the process.
The time to prepare for selling your business is now. An experienced business broker or M&A advisor knows the ins and outs of EBITDA and its layered complexity. The sooner you begin working to prepare your business to be sold, the better.
Copyright: Business Brokerage Press, Inc.
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Selling Your Business: Key Questions and Answers
Selling your business is a significant decision. You’ve invested considerable time, money, and effort into building and running it—perhaps it even represents your life’s work. Now that you’ve decided it’s time to sell, getting the best professional advice is crucial. This is where working with a professional business broker can be the key to not just selling your business, but selling it at the best price and terms possible.
Here are some common questions sellers often ask, along with answers based on experience and expertise. If you have additional questions, don’t hesitate to consult your business broker.
What Can Business Brokers Do, and What Can’t They Do?
Business brokers are specialists who facilitate the smooth sale of businesses. It’s important to understand their capabilities as well as their limitations. A professional broker helps sellers price the business and structure the sale in a way that benefits both the buyer and seller. They can locate potential buyers, guide negotiations, and assist in completing the transaction.
However, a business broker isn’t a miracle worker who can sell an overpriced business. For a business to sell, it must be priced and structured appropriately. The market ultimately dictates what a business will sell for. The seller’s flexibility with terms and down payment options can also influence the selling price and the likelihood of a successful sale.
How Long Will It Take to Sell My Business?
On average, it takes about five to six months to sell most businesses. However, this is just an average—some businesses may take longer to sell, while others may sell more quickly. The quicker the broker has all the necessary information to market your business, the shorter the process is likely to be. Pricing the business right from the beginning also plays a major role. Some sellers overprice their businesses, thinking they can always lower the price later. Unfortunately, this strategy often backfires because buyers may avoid an overpriced listing entirely.
What Happens When There’s a Buyer?
When a buyer is seriously interested in your business, the broker will assist in preparing an offer. This offer may come with contingencies, such as a review of financial records, lease agreements, franchise agreements, or other important business details. The buyer’s offer will be presented for your consideration. You can accept the terms, make a counteroffer, or decline it altogether. Keep in mind, though, that the buyer can withdraw their offer at any time if negotiations don’t move forward.
Your broker will present all offers to you for consideration. The first offer might not be perfect, but it’s essential to review it carefully. Sometimes, the first offer can be the best one you’ll receive. While you shouldn’t accept just any offer, all offers deserve close examination.
Once you and the buyer agree on terms, the broker will help with satisfying any contingencies. It’s crucial to cooperate fully with the buyer during this stage to avoid any perceptions that you’re withholding information. Buyers may bring in outside advisors to review your business, and once all conditions are met, the final paperwork will be prepared and signed. After the sale is finalized, funds are distributed, and the buyer takes possession of the business.
How Can I Help Sell My Business?
You can assist in the process by fully cooperating with your broker and any other advisors, such as accountants or attorneys. Buyers will require up-to-date financial information, so it’s helpful to work with your accountant to provide this. If you have legal representation, make sure they’re familiar with the business sale process and are available to attend the closing, especially if you want a quick sale. Delays caused by your attorney’s schedule could give the buyer a chance to reconsider or amend their offer.
Ultimately, your team of advisors should all be working toward the common goal of selling your business at the best possible price and terms, while closing the deal as quickly as possible. Cooperation with all parties involved is key to a successful sale.
Copyright: Business Brokerage Press, Inc.
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The Critical Role of Storytelling in Selling a Business
Every business has a story to tell. In fact, selling a business involves the art of storytelling as you must pique interest and enthusiasm in the mind of the buyer. Through storytelling, you can convey not only the history of a business, but also its future.
Good business brokers and M&A advisors are storytellers who know how to relay the core truths and the core values of a given business. Storytelling is a fantastic way for business owners to let the world know more about their business, why it is special and what it can offer another owner in the future. A good business story will convey the future of the business and help a prospective owner see themselves as the lead character in an ongoing narrative. Great stories and great businesses are ones that can clearly present their truths and encourage the recipients of the story to take action.
When it comes to selling a business, the story must begin with the financials. As soon as a business broker begins working with a seller, they will collect as much information as possible about the business including financial information. The financials help to paint a picture of a business in a way that no other information truly can.
It is only once brokerage professionals have the financials in their hand that they can begin to craft the true and compelling story of the business. Once this information has been digested and analyzed, it can be presented in many forms including a confidential information memorandum or a confidential business review.
While there is no denying the role of facts and the financials in painting a picture of a business, it is not the only factor. Emotions undoubtedly play a role in the decision-making process. A good story is one that is able to seize upon the imagination and help the recipient of the story see themselves in the story.
A prospective buyer has to be able to see themselves owning the business in question. In fact, the buyer has to be the hero of the story, who takes over the business and guides it into a very successful future. Like all successful sales, it is necessary to sell not just the physical item—in this case, a business—but also the dream that accompanies it. It is key to convey to the buyer how they will benefit from owning the business.
If you are planning to sell your business and can successfully convey to a prospective owner how he or she will benefit from owning your business, then much of the battle is already won. An experienced business broker can help owners cultivate, shape and present the right story for their business, and achieve the optimal selling price in the process.
Copyright: Business Brokerage Press, Inc.
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How Inexperience Can Impact Your Business Sale
The lessons learned through hands-on experience are often irreplaceable. When it comes to selling or transferring ownership of a business, inexperience can be particularly troublesome. Many business brokers and M&A advisors have observed firsthand the jeopardy business owners can face when they either attempt to sell their business on their own or engage someone without the proper experience. For instance, holding an MBA or a law degree cannot substitute for the years of tangible experience that brokerage professionals possess. Selling a business is a complex process, and there is simply no substitute for experience. Let’s examine some common errors stemming from inexperience.
First on the list is the failure to involve the CFO. An inexperienced party should not handle financial details, as serious buyers will want to meet with your CFO. This meeting will be part of the due diligence process, so it’s essential to involve your CFO early on. Organizing a meeting between your CFO and a prospective buyer is a smart move, as it demonstrates transparency regarding your financials. Inexperience in the financial realm can be highly detrimental.
While failing to include your CFO early can be a big mistake, incorrect financials can be equally problematic. An inexperienced party should not handle your offering memorandum due to the potential for errors. What might seem like a minor error on paper can be perceived differently by a potential buyer. Omitting key information could ultimately harm a buyer’s trust or lead to a reduced bid. The financial information of your business tells a story, and it’s crucial that this story is accurate and up-to-date.
The first two inexperience-related problems can cause a deal to fall apart or result in a lower final offer, but the next issue is even more severe. An inexperienced party may not understand the importance of a confidentiality agreement or may fail to execute it properly. This can be more problematic than it first sounds.
In fact, the significance of a confidentiality agreement alone justifies working with an experienced business broker when selling your business. Without it, key employees, customers, suppliers, and even competitors might learn that your business is for sale. This disclosure could lead to chaos: key employees might seek other positions, customers might take their business elsewhere, and competitors might seize the opportunity to gain the upper hand. Maintaining confidentiality is paramount when selling your business.
Inexperience can make any endeavor more challenging. But given the high stakes involved in selling a business, relying on those without adequate experience is risky. Inexperience can do more than jeopardize a deal—it can potentially harm your business.
Copyright: Business Brokerage Press, Inc.
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Unraveling the Complex Realities of Valuations
Determining an accurate valuation for a company is far from straightforward. It involves a range of complex, and often rapidly changing, factors. The challenge is compounded by the fact that some aspects of valuation are inherently subjective. This means that different professionals might ultimately arrive at different conclusions. Despite these challenges, we can establish ways to navigate the valuation process effectively.
One key factor to consider is the ownership structure of the company. A company that is partially or fully employee-owned, for instance, may be perceived as less marketable. Many owners may not realize that Employee Stock Ownership Plans (ESOPs) can significantly impact the overall value of a company, however, this is true as well.
Intellectual property (IP) is another crucial element that comes into play with a valuation. Assessing the value of patents, trademarks, and copyrights can be challenging but is essential for an accurate valuation. The value of these intangible assets plays a significant role in the overall assessment of a company’s worth.
Technological advancements can also influence a company’s valuation. Companies, especially those focused on technology, may face obsolescence due to rapid technological changes. Even businesses outside the tech sector can be affected by technological disruptions. If a business is approaching the end of its life cycle, its valuation is likely to reflect that reality. Additionally, vulnerabilities to supply chain disruptions can negatively impact a company’s valuation.
The diversity and range of products and services offered by a company are important valuation factors as well. A company with a single product or service may be harder to value than one with a diverse product portfolio. Generally, companies with greater product diversity are valued higher. Similarly, companies with a broader customer base are often valued more favorably compared to those reliant on a few key customers.
In summary, accurately valuing a company requires a balance of art and science. It involves both intuitive judgment and analytical rigor. Collaborating with a skilled business broker or M&A advisors can help navigate the complexities of valuation and ensure a thorough and accurate assessment.
Copyright: Business Brokerage Press, Inc.
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