Maximizing the Multiple of Your Earnings or Revenue, Part 1
Updated: Jun 12
Most business valuations key off a multiple of earnings or revenue. So, you want to maximize the multiple of your business.
There are hundreds of ways for the sale of a business to go south. It's said that every deal dies at least three times before the sale goes through.
The greatest value that business consultative brokers add is our ability to counsel sellers and buyers through the process, should they hit bumps in the road.
Buyers don't want to overpay or miss something that might hurt their success. For sellers, it's a big life change. And every decision you've ever made in your business is being questioned.
What could possibly go wrong?? Having been through hundreds of sales over the past decade, we've seen almost every possible horror story, including:
Sales falling through at the last second. One was canceled an hour before the funds were wired, because the buyer got slapped with a lawsuit
Valuation slashed sometimes down to as much as 50% of the original price
Business owners having to take the business back six months after the sale, when the buyer ran it into the ground.
To prepare you so that these issues are less likely to happen, we developed the 4P method. This system has not only helped salvage many sales, but it's also led to higher valuations, premium positioning, and better deal terms.
4P Method to Maximizing Your Multiple The 4P method starts with Planning. We assess where you are today, discuss your personal and business goals, and talk about what it will take to get there.
Step two, Prepare by executing the plan to get you the highest value. It can involve cleaning up financials, putting in place or documenting standard operating procedures and more, so we can tell the right story when you're ready to sell.
Step three, Price. Getting buyers to submit Letters of Intent. We want multiple offers to encourage a bidding war. This is also where we help you get through the deal process, including due diligence.
Step four, Passing the torch. Why is this important? Legacy. If the buyer is successful, and the business continues to do well, not only does your legacy continue, but your employees, customers, and suppliers will all be taken care of.
It also assures you'll get any seller carryback note or earn-out payments that may be part of the deal (and you won't get the business back months down the road, in terrible shape, because the buyer failed.) Finally and most importantly, you'll minimize the risk of any post-close litigation. No one wants a lawsuit because the buyer believes there was misrepresentation.
STEP ONE: Planning for a Successful Sale What do you think is the number one reason a business sale falls through?
Owners are not ready to sell.
They think they are. But ultimately, they can't let go of their baby. Maybe they're not sure what they'll do next. Or they aren't financially prepared, and the price isn’t enough for retirement or whatever they have planned next.
These are both solvable, if the right plan is in place. Sellers should prepare by having a plan for after they sell. Some call this a “third act” ̶ and increasing the business's value can get you there.
To assess your readiness to sell, we look at three factors: 1. How ready are you? 2. Is the business in shape? 3. What's going on in the market? If market timing is bad, the other factors may not matter. For example, during the recession in 2007 and 2008, it was difficult for buyers to fund any business purchases, because the capital markets were so tight. So, we look at other market factors to ensure there's liquidity, so buyers can get funded. And we review other industry dynamics that might affect the ability to sell. Sometimes, the business owner just isn’t ready to sell . . .
An alarm business was owned by a husband and wife. The husband believed he was ready to sell, but it may have been his wife who was really ready. She worked in the business and wanted to retire. He was 76. And even as customers were asking when he was going to retire, our brokers got three competitive offers.
One especially seemed like a great fit. The buyer had a similar background to the owner, and the buyer and seller had very similar values.
Everything was moving along until the last minute when the owner got uncomfortable. He didn't know what he would do with himself without his business to look after. He wasted lots of time and legal fees only to back out. Now, he'll have to repeat the process, or his family will force him to sell when he's no longer capable. In this case, even though he said he was ready, he really wasn’t.
STEP TWO: Preparing Your Business As consultative brokers, we want to prepare your business for sale, so we can tell a compelling story to buyers.
The most common mistake is with the financials. We need clean, accurate books. We say: Your financials tell a story, so let's make it a bestseller.
A couple of areas we look at is how and when you recognize revenue and expenses. One seller only did so when he fully completed large projects, which understated his current profits on an accrual basis. Correcting for this alone justified a much higher price.
Another common issue is processes. Can the buyer run the business the same way without you? If not, the business will be valued lower.
One client monkeyed with the timing of his revenue recognition to make his books look better. He recognized the revenue in the year he collected it, but pushed the expenses that generated the revenue into the following year.
When we looked at his books through the lens of a buyer, it was clear the business had no profit that year. We helped the owner fix his books and grow his business. As a result, he got a price of $1 million over what he expected.
Next time, we'll take more about maximizing the multiple of your earnings . . . Steps 3 and 4 of our 4P Method for Maximizing Your Multiple.