Top 4 Myths About Selling Your Small Business

Most small business owners only sell their company once.
The steps involved in selling your small business is a complex process. Your goal as a business owner is to sell your company quickly and get the most amount of money in your pockets at the end of the day. Don’t fall for these common myths that could affect the sale of your business and ultimately the financial security of your family.
Do these sound familiar…

Myth #1 – I Can Sell my Small Business Myself

Entrepreneurs like to do things themselves. Many feel that they are qualified to sell the business without any assistance from professionals. This way of thinking can be a huge challenge to the successful sale of the company. Just because an owner can sell a product or service does not mean they can represent and sell their company.

There are three major issues if you want to sell the business yourself.

1. If you want to sell your small business yourself, confidentiality is lost.  What will your competition do if word gets out that you are for sale?
2. What will your clients, employees and suppliers think if they know you want to leave the company? Will your business drop? Will your credit from the bank be redefined?
3. Will you have the time? There is a lot of work to do when selling a business. You will need to compile the marketing materials, advertise the listing, screen buyers and determine if they are serious or kicking tires, and facilitate due diligence. In addition you need to focus on growing the company so that a buyer will not walk from lack of sales.

When it comes time to sell your business you need to keep focused on running the business and increase your sales. You need to concentrate your efforts on issues that matter to a prospective buyer not to take on new challenges.

Myth #2 – I’ll Sell my Small Business When I’m Ready

Certainly, it is important to be emotionally ready to sell. However, personal readiness is just one factor in selling. There are economic factors to also consider.
The price of your business for sale can be affected by industry consolidation, interest rates, unemployment and many other economic measures. Talk with a certified business broker about what it takes to sell your small business so that when you are ready your company is also.

Myth #3 – I Know What my Business is Worth

This is one of the key areas that owners find most shocking. Many small business owners have no idea what their business is worth in today’s market. For some business owners they base the value of the company on what they need for retirement. Others will tell you they want $100,000/year for “sweat equity.”  Still others utilize industry multiples. What happens if all these are false? What if the market is not willing to pay you what you think your small business is worth?
A third party valuation is a good idea for anyone seriously considering the sale of their business.  An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company’s growth potential, not some vague industry average.

Myth #4 – Selling a Small Business is Like Selling a House

When you prepare to sell your house it may take only a few weeks. Once your house is ready you bring it to market and get the word out to everyone that the house is for sale. Once you get an offer that you are happy with, you sign on the dotted line, turn over the keys and move on.
Selling a company is much more complex. A successful business sale usually requires a great deal of pre-planning, at least a year and maybe as long as three years to drive sales, develop key staff, document the operations and control expenses.
The average house will sell in less than four months, while the average business sale is nine months to a year.
Even after the business is sold, the seller can be expected to put in at least a few months, and possibly years of transition time, to help the new owner run the business successfully.
Go to market with realistic expectations by getting a professional valuation and using a professional business broker or intermediary.
These are just some of the myths that business owners need to be aware of before selling their business.
For more information talk with your advisor or business broker who specializes in helping business owners transition.

Article by Small Business BC posted October 4, 2010.

Help! What Is My Business Really Worth?

Published in Nanaimo Magazine September 2010 Issue.

To view the published article: http://www.downtownmagazine.ca/nanaimo/nanaimomag.php

Popular approaches often used to value a business are Income, Asset, and Market methodologies. There are five different Income methodologies, in each case businesses are valued based on company earnings. Buyers’ main concern is the true or absolute income of the company. The net ordinary income, reported on the profit and loss statements for tax purposes, does not depict the true earnings of the company based on non-cash, discretionary, & non-recurring items expensed by the owner.  Reported earnings are usually intentionally kept low to manage taxes. Therefore, to determine the true earning capacity of a business, the profit & loss statements must be re-cast during the valuation process. The business value is then calculated by applying a multiple, consistent with the industry and a weighting of the factors affecting the business, to the SDE or adjusted EBITDA.

Seller’s Discretionary Earnings (SDE) is generally utilized for businesses under $1 million in earnings. Typically, these businesses are owner-operated, the owner receiving a salary through the company.  It is important to determine the ‘owner benefit’ as opposed to the ‘earnings’ of the business. Add-backs or normalizations are applied to the pre-tax business earnings and expenses to adjusted fair market value.

Earnings Before Interest Taxes Depreciation Amortization (EBITDA) is generally utilized by larger companies with income in excess of $1 million to define the earnings of the company.  In most cases, the owner/investor does not actively direct the company operations and pays a general manager to perform that function.  Therefore, the EBITDA calculation differs from SDE as it includes the manager’s compensation in the earnings calculation as an expense.  EBITDA is a good measure of core profit trends because it eliminates some of the extraneous factors and allows a more "apples-to-apples" comparison.  However, EBITDA should not replace the measure of cash flow, which includes the significant factor of changes in working capital. 

These methodologies all use historical data and do not account for the current cycle or health of the industry in the current economy, nor do they account for the condition of the geographical area the company services. These two factors are the other important considerations in each valuation analysis provided by BC Business Brokers. To develop a full picture of the health of any given firm, a multitude of measures must be taken into consideration.

BC Business Brokers receive in-depth training in the 12 common accounting methodologies of Business Valuation through the IBBA University (International Business Brokers Association), have prior business ownership experience, and are provincially licensed and regulated.  If you are contemplating the sale of your business, or may be considering small business ownership, feel free to contact the Sunbelt Nanaimo office – we can help you.  Visit our local website at www.bcbusinessbroker.ca or www.sunbeltnetwork.com/vancouverisland or phone 1-877-289-0969.