It’s perfectly acceptable to approach selling your business with a pinch of optimism. But, optimism can quickly get weighed down by unpleasant surprises, and what you don’t know can hurt you and your business when you approach the negotiation table.

ExitBig illuminates the process of selling your business. We’re here to help you understand what to expect when selling your business, and what you can do to boost your value.

Set the Table for Business Negotiations

What's Your Financial Goal?

One of the first steps to approaching the negotiation table effectively is to know your financial personal goals. What are your plans after selling your business? It may seem overly simple, but keep in mind that 65 percent of business owners don’t even know the value of their business. Worse, 85 percent don’t have an exit plan.

Know Your Number

If you plan on retiring after selling your business, for example, knowing how much you’ll need to cover your expenses as a retiree is an important first step. Retirees, on average, spend about $60,000 per year, but this number can vary widely.

What’s your desired lifestyle in retirement? Keep this top of mind when preparing your business to be sold, or when fielding offers.

Understand the value of your business

Now that you know how much you’ll need to reach your financial goal, it’s time to roll up your sleeves and find out what your business is actually worth. A helpful way to do this is to receive an opinion of value. 

Some of the most important factors that go into an opinion of value analysis can give you an approximate range of your company’s value.

A Quick Look at Your Financials

Of course, an appraisal of your small business will eventually come down to peering under the hood. Here’s where we like to start.

Profit & Loss Statement (P&L)

Like the name suggests, looking at the Profit & Loss Statement gives you a clear summary of a company’s ability to generate profit over a specific period of time. ExitBig requests P&Ls from the past three years.

Specifically, your P&L reveals your earnings before interest, taxes, depreciation, and amortization (EBITDA). This gives you a very straightforward view of your raw financial performance and can be viewed as an alternative to net income in some cases.

Balance Sheet Can Reveal Debt

Next, is your balance sheet. As you probably know, this helpful document shows the items your business owns that contribute to revenue (assets), and what you owe (liabilities). 

One of the main reasons why the balance sheet is important is because it quickly spells out your business’ debt liability. In most cases, your debt will be deducted from your proceeds after selling your business. 

When Balance Sheet Debt Comes into Play

Suppose a buyer agreed to buy your business for $8 million, but it carried $3 million in debt. The ultimate proceeds will be $5 million. Buyers want to be debt-free when they buy a business. So, you, the seller, is responsible to pay off the debt when the business is sold.

Excessive amounts of debt shown on your balance sheet can even make your business less desirable to prospective buyers. In many ways, the balance sheet gives the most complete picture of your company’s financial health. 

Tax Returns

Tax returns (or any financial document) are used to verify that data from the P&L and Balance Sheet have been properly reported. These documents show you a quick breakdown of previous years’ income and expenses. Comparing these numbers on a year-over-year basis makes it easier to forecast future revenue.

Finding your Earnings "Multiple"

The financial factors mentioned above are strong contributors to your company’s value and provide a rough idea of your company’s earnings multiple. There are also key intangibles that can increase your company’s earnings multiples, which we cover in the following sections.

If, for example, your company's EBITDA is $3,000,000 and you’re looking to sell it for $9,000,000, you’re valuing it at three times EBITDA (or 3x). According to our findings, business multiples are often around 3, but can vary by industry.

To make a strong multiple a reality, you’ll need to reduce the buyer’s risk, and make your revenue as predictable as possible. We’ll cover some helpful business intangibles to make it happen.

How to Improve Your Business’ Value

So, you’ve peered under the hood (or you’ve asked your accountant to) and found that your business has room for improvement. While it may not be ideal to sell your business today, these straightforward strategies can help you get your business up to its fighting weight so it can be sold in the near future. You can look for these positive attributes if you're looking to buy a business, too.

Become Less Involved

While it seems counterintuitive, the more of a lynchpin you are to your company’s revenue or overall success, the less attractive it is to buyers.

Why? Your business model needs to be as close to plug-and-play as possible. If your presence is required for the business to run smoothly, what happens when your business is acquired and your presence is removed? This can spell big trouble for the buyer.

Find ways to make your business more efficient, by creating repeatable processes, hiring managers, or anything that otherwise makes your business more automatic. You can’t be the lifeblood of the business if you want it to sell at a strong price.

Put Together a Leadership Team

If your company has a leadership team, even a small one, it shows that your company has a strategic planning capacity. Plus it also shows that there are others who are invested in your company’s success, and in it for the long-haul. These factors speak volumes to prospective buyers.

Diversify Your Clients

If your company is heavily dependent on one big client, a few cash cows, or the like, this can spell trouble when it's time to sell your business.

Having one big client is great when getting your business off the ground, but is extremely risky in the long run.  Obviously, diversifying your customer base or client base is easier said than done, but it’s very much worth the effort. Having a large portion of revenue from a small number of customers can be a red flag if someone is looking to acquire your company.

Work with the Right Clients

Boosting your business’ value is somewhat simple–but certainly not easy. As you’re heavily involved in the day-to-day operations of your business, handling all of these strategic items on your own can be overwhelming. Fortunately, working with the right partner–like ExitBig–can make this whole process easy.

ExitBig is fully dedicated to helping buyers and sellers achieve exceptional results. Whether you’re ready to put your business up for sale today, or if you’re very early in the process and simply curious of your business’ value, ExitBig can help successfully move forward.

At ExitBig, our successful transactions reflect our industry acumen, ability to solve problems, and commitment to happy clients.

Check out our learning center, or contact us today and make a big step forward to your success.