Obtain The Best Possible Purchase Price for Your Business
When it comes time to sell, every business owner’s goal is to realize the highest possible purchase price for their business. While the sales process must be kept confidential, every seller’s ultimate goal is to ensure their own financial freedom and security. Hiring the right business broker is necessary in order to receive the best possible purchase price. This is accomplished by correctly identifying the maximized ‘owner benefit’ of the business, ensuring that the business is properly advertised throughout the world in order to create a liquid market, and exploring financing options with potential buyers.
Maximizing ‘Adjusted Owner Benefit’
The ‘adjusted owner benefit‘ is the annual amount of true economic profits derived by a working owner from a business. Sometimes the adjusted owner benefit is referred to as the Seller’s Discretionary Earnings (SDE). Most buyers base their buying decisions on the advertised adjusted owner benefit. All else being equal, most buyers generally assign a multiple (between 1.5x – 4x or more) of the adjusted owner benefit in order to derive their valuation of the business. If the advertised adjusted owner benefit can not be generally proven via financial documents such as tax returns, bank statements, Point of Sale reports, or by observing the business, then the valuation of the business will suffer. This is why it is absolutely crucial that sellers keep accurate and professional accounting records of their business.
Example of Maximizing ‘Adjusted Owner Benefit’
- Let us assume that John wishes to sell his auto shop (John’s Auto Shop) and consults with a professional business broker.
- The business broker analyzes John’s financials as a first step towards establishing the adjusted owner benefit (which is the key factor in establishing the valuation of the auto shop).
- To begin, the broker looks at John’s most recent tax return, and determines that the annual EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of the business is $200K.
- Then the broker must ‘add-back’ any expenses on the tax return that were in fact John’s personal expenses.
- The broker determines these ‘add-backs’ to be $50K, and confirms with John that he can prove that these expenses were personal in nature and would not be applicable to the buyer of the business.
- Then the broker determines that John paid himself (as a working owner) and his wife (who is absentee) a combined salary of $100K/year.
- Since this combined salary is an economic benefit to John, it is also considered to be part of the adjusted owner benefit.
- Importantly, John’s role in the business is replaceable by the buyer of the business, so John’s salary would still be available for the benefit of the buyer.
- Lastly, John mentions that he took in $50K of unreported cash during the year.
- So long as this may be proven to a reasonable buyer’s satisfaction, this amount is also considered to be part of adjusted owner benefit.
- Altogether, John’s adjusted owner benefit is $400K.
- The valuation of John’s Auto Shop is thus based on $400K/year of adjusted owner benefit rather than the EBITDA from the business of $200K/year.
Establish Liquid Advertising Market for Business
In order to properly ensure that a business receives the highest possible purchase price, it must generally be exposed to a sufficient number of buyers. A thick or liquid market refers to a market where there are many buyers and sellers, resulting in enough volume so that price volatility is lessened. It is crucial to properly advertise the business in local, regional, and international venues where there are many buyers and many sellers. In this manner, the available businesses for sale may be compared against each other, and a sufficient level of serious buyers will create enough demand to ensure the highest possible offer and eventual purchase price.
Confidentially Advertising the Business
Confidentially advertising a business for sale is the job of a professional business broker. The business broker must construct a professionally written and well informed advertisement in order to ‘whet the appetite’ of potential buyers. The advertisements should not, however, disclose the actual identity nor specific geographic location of the business. It is essential that the business advertisements are highly visible to any and all potential buyers seeking to buy a business from anywhere in the world. Multiple websites that advertise businesses for sale should be deployed by the business broker.
External Financing Options Help Increase Purchase Price of Businesses
A final way to maximize the purchase price of a business is offering potential buyers the opportunity to partially or fully finance their purchase. The financing may come from Small Business Administration (SBA) backed bank lending or from seller-financing. Offering financing options opens up the potential pool of buyers to those who may qualify for external financing but who can not pay cash for the business. This in turn creates a more liquid market for the buyers (by creating more potential buyers) which ultimately raises the purchase price of the business.
SBA-Backed Deals May Maximize Purchase Price for Your Business
SBA-backed bank lending typically involves the seller receiving around 90% of the purchase price in cash at closing. The purchase price is subject to an SBA appraisal, which often hinges on the accuracy and organization of the seller’s financials such as tax returns. Depending on the appraisal methods and interest rate environment, the purchase price from SBA-backed lending is frequently higher than what a seller would ordinarily receive for their business. Sellers should beware though that SBA-backed lending often involves many months of waiting and uncertainty before the deal may close.
Seller-Financing Also an Option to Maximize Purchase Price for Your Business
Sellers also generally receive a higher purchase price for their business from partially seller-financed transaction (where the seller holds a portion of the purchase price as a Note due from the buyer) because buyers do not have to fully fund the deal. Instead, the seller assumes the risk of the buyer defaulting (using the assets of the business as collateral). This risk should (in theory) be compensated for by a higher overall purchase price.
A professional business broker should ensure that every seller receives the highest possible purchase price for their business. The adjusted owner benefit must be properly identified and presented to buyers in a liquid market, while the buyer’s financing options must also be explored.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.