Selling a Business - Know your Numbers!

The 6 Numbers Every Smart Business Owner Must Know BY CURTIS KROEKER

As you prepare to sell your business, consider these key numbers as indicators of how financially successful your exit will be.

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Facebook recently made news when it acquired WhatsApp for $19 billion. That's a lot of money. It left many wondering how Facebook could justify spending that much for a messaging-app startup.

But despite rampant speculation about Facebook's motives, you can bet that its decision ultimately boiled down to numbers. Facebook evaluated a set of key metrics that are important to the company and determined that WhatsApp was worth the investment.

Although the dollar valuations are a lot lower for sellers of small and midsize businesses, buyers in the business-for-sale market place a similar emphasis on numbers. In fact, there are at least six important numbers that business sellers need to consider when they prepare to market their companies to potential buyers. They are:

1. Revenue

Gross revenue is a major concern for business buyers. When buyers evaluate potential business acquisitions, annual revenue totals help them gauge the size and potential of the business as well as its relative position within the industry.

As a business seller, it's important to show a trend of positive revenue growth. A top-line growth curve creates confidence that the buyer will be able to generate sales and revenue after the business changes hands. In many cases, a positive revenue trend can justify a higher sale price--especially if you can demonstrate a significant amount of recurring revenue.

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2. Seller's Discretionary Earnings

Seller's Discretionary Earnings (SDE) speak to the cash flow of the business and represent net income before taxes, interest, depreciation, amortization, owner's income, owner's benefits and nonrecurring expenses.

A figure that is often associated with Seller's Discretionary Earnings is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). However, EBITDA is usually only used in larger mergers-and-acquisitions deals. Business with earnings below $1 million and sales prices in the $2 million and under range tend to use SDE.

Discretionary Earnings averages over the past three to five years matter to buyers because they provide a realistic gauge of the financial benefit a new owner can expect to receive from the business on an annual basis.

3. Earnings Multiple

Seller's Discretionary Earnings directly impact business valuation by way of an Earnings Multiple. Most Main Street businesses ultimately sell for a price that is one to four times the annual Sellers Discretionary Earnings figure.

Of course, Earnings Multiples vary according to the attractiveness and appeal of the business that is being sold. Some of the factors that justify a higher multiple include business performance, financial records, product line, recurring revenue, brand reputation, competitive position, key staff that will remain with the business, and other variables that make it easier for a new owner to successfully operate the company.

4. Valuation

The valuation of most listed businesses is based on cash flow or Seller's Discretionary Earnings modified by an Earnings Multiple, plus the cost of inventory and real estate assets.

If the valuation figure is too high or too low, it can easily jeopardize your ability to sell the business in a profitable and timely manner. Since business sellers often lack the expertise and objectivity to accurately value their companies, the assistance of an experienced business broker is critical during this stage of the process. A good broker will also use comparable sales of similar businesses when determining the appropriate valuation for your business. 

5. Asking Price

The determination of an asking price is one of the last challenges to be addressed prior to listing. The idea is to identify an asking price that is competitive with other listings and will attract a significant number of qualified buyers, but not so low that it will be impossible to realize full valuation at closing.

Based on the thousands of closed small business transactions that are reported on BizBuySell.com each year, the average business ultimately sells for 87 percent of the asking price. Again, your business broker's expertise will be essential in setting the right asking price for your company.

6. Net After-Tax Sale Proceeds

Net After-Tax Sale Proceeds is another number that should be on the radar of all business sellers. Since a certain portion of sale proceeds may be required to go to the government in the form of taxes, it's important to know the amount you will clear when you walk away from the sale.

The good news is that there are various strategies that can be used to minimize or defer taxes, resulting in a larger portion of sale proceeds going into your pocket at closing. Common tax minimization strategies include delaying the receipt of sale proceeds, converting from a C Corp to an S Corp or LLC, transferring stock to family members, structuring asset purchases to obtain a more favorable capital gains treatment and using trusts to reduce estate taxes. Consult with your business broker and/or a tax planning specialist to determine how to maximize the proceeds from the sale of your business.

Selling a business isn't just about the numbers--it's a combination of art and science. But by understanding the numbers that matter to potential buyers, you can better position your business for a smooth selling process.

IMAGE: SHUTTERSTOCK

LAST UPDATED: MAR 10, 2014

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CURTIS KROEKER is group general manager for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces. BizBuySell.com has more than 910,000 monthly visits.
@BizBuySell

Mentoring

Mentoring Suggestions from Fast Company

6 WAYS TO BE A KICK-ASS MENTOR

THERE ARE MENTORS, AND THEN THERE ARE KICK-ASS MENTORS. AND IF YOU’RE GOING TO TAKE ON THE MANTLE OF GIVING SOMEONE ELSE CAREER GUIDANCE, INSIGHT, AND ADVICE, YOU MIGHT AS WELL ASPIRE TO GREATNESS.

BY GWEN MORAN

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After Kristin Mosher signed up for Pathbuilders, an Atlanta, Georgia, leadership and mentoring company, and found out her new mentor was a man, she was a little skeptical. Newly promoted and leading a production and operations services team within Turner Sports’ Creative Services Sports Unit, she was unsure that a man would understand some of the challenges women face in the workplace leadership roles.

Now, she admits, she couldn’t have been more wrong. Her mentor, Peter Scalera, currently vice president of trade marketing and execution at InComm in Atlanta, brought several important attributes to his role that made him a great fit--and helped Mosher settle into her big new role with ease. He even went so far as to meet with her supervisor and some of her informal mentors at Turner to get a better sense of who she was and where she could use advice.

UNLIKE A THERAPIST, A MENTOR HAS MORE LATITUDE TO SHARE PERSONAL EXPERIENCES AND INSIGHTS--AND EVEN TO SAY, "THIS IS WHAT I WOULD DO IF I WAS YOU."

“He made himself completely accessible. We related to each other and there was an understanding of confidentiality. He really went above what could have been expected,” she says.

There are mentors, and then there are kick-ass mentors. And if you’re going to take on the mantle of giving someone else career guidance, insight and advice, you might as well aspire to greatness. Here’s how.

1. GET INVOLVED.

Scalera’s field trip to Turner is a great example of how exceptional mentors can help their protégés. That involvement is one of the hallmarks of great mentors, says Ellen Ensher, Ph.D., professor of management at Loyola Marymount University in Los Angeles and co-author of Power Mentoring: How Mentors and Protégés Get the Most Out of Their Relationships. Great mentors take the job seriously and learn as much as they can about the people they are counseling. It’s tough to be a great mentor if you don’t put in the time doing your homework to understand the person and his or her career and life situation, she says. Act as if it was your career on the line.

2. BE ACCESSIBLE.

When Scalera mentors someone, he doesn’t limit meetings to once-a-month conference calls or coffee. If you’re letting a month lapse between meetings, you’re not really building a relationship with your protégé, he says. He’ll hop on the phone to talk through a work challenge or will review a PowerPoint deck before a big meeting. That kind of accessibility makes all the difference, Ensher says. Great mentors are available in those high-stress moments to be a coach as you stretch to master a new skill or navigate a crisis situation.

3. LEARN TO LISTEN ACTIVELY.

Being a great mentor isn’t just about listening--it’s about listening with intent. Scalera, who won Pathbuilders Mentor of the Year Award in 2012 after Mosher nominated him for it, asks questions about his protégé’s current responsibilities and challenges, as well as his or her goals and aspirations. When he doesn’t understand something or thinks that there may be more to the story, he asks more questions. That helps him draw parallels to his own experiences to gain more insight and give good advice.

“It doesn’t really matter what company you have worked for, if you [have similar] roles in your past. I can quickly figure out when there are a lot of similarities between the experiences I had and what [a protégé is] dealing with,” he says.

4. BE HONEST.

You’re not doing your protégé any favors by being too nice or not addressing the tough issues head on, Ensher says. You need to be straightforward. When you think your protégé is screwing up or about to knock it out of the park, say so. Unlike a therapist or even a life coach who isn’t supposed to interject his or her own feelings into the conversation, a mentor has more latitude to share personal experiences and insights--and even to say, “This is what I would do if I was you.”

5. OPEN YOUR NETWORK.

Assuming believe in and trust your protégé, making introductions is an important part of being a kick-ass mentor. You have the benefits of being higher up on the proverbial food chain and, likely having a more powerful if not bigger network. If you know someone who can help your protégé, make the connection, Ensher says. And if your protégé isn’t someone who you’d be comfortable referring to a trusted colleague, it may be time to re-think the relationship.

“You have to have chemistry. And this person is going to be linked to your name if you act as a mentor. If you’re not comfortable with that, this may not be the right relationship for you,” she says.

6. KNOW WHEN IT’S TIME TO LET GO.

For Scalera and Mosher, the mentoring relationship had a specific time frame through the program that matched them. However, they still keep in touch and meet informally. When less formally structured relationships run their course, it’s time to know when to let go, Ensher says. Great mentors may even help their protégés find their next mentor, understanding when it’s time to let go and let someone else step in.

[Image: Flickr user James]

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GWEN MORAN

Gwen Moran writes about business, money and assorted other topics for leading publications and web sites. She was named a Small Business Influencer Awards Top 100 Champion in 2012 and is the co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010). She is currently creating Biziversity.com, an information resource for micro-businesses, from her office near the Jersey shore--the beautiful place, not the horrible television show.