19 Dec How to Add Millions to the Value of Your Business
This month, we are sharing another blog post from Eric Knam with ActionCOACH Tulsa. Eric is a certified business coach providing business help, advice, and mentoring services to small and medium-sized businesses. We’ve watched many of our business colleagues move from working IN their business to working ON their business, enjoying the perks of being the boss as a result of partnering with Eric.
Keep reading to learn more about how to add missions to the value of your business with one simple shift!
Add Millions to The Value of Your Business With One Simple Shift | Action COACH
Are you interested in knowing what your business might be worth? If so, it can be helpful to look at what buyers are paying for companies like yours these days. It’s a fair bet that you’ll find that businesses like yours trade for a multiple of your pre-tax profit.
Sellers Discretionary Earnings (SDE) tend to be used for small businesses and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) is used for larger businesses.
Stressing Over Your Multiple
Very often business owners get laser-focused on their multiple and how they can increase it. After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.
Obviously, your multiple will have a significant impact on the size of the check you take home after the sale of your business. Something else you need to consider is the number your multiple is multiplying (your profit).
Profitability Is Open to Interpretation
Most entrepreneurs see profit as an objective measure that is calculated by their accountant. When it comes to selling your business, profitability can become extremely subjective. You should expect several “adjustments” to be applied to your financials to determine how profitable your business might be for a new owner.
Understanding the “adjustment” process and how you can use it to your advantage will allow you to dramatically increase the value of your company. Imagine your company generates $3 million in revenue and you pay yourself a salary of $200,000 a year. It is likely that you could hire a general manager for $100,000 per year to take over your day-to-day responsibilities and run the business for the buyer.
In this example, you could easily make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit for them. If the multiple for your business is five times profit, that one adjustment has the potential to earn you an extra $500,000.
You should be able to make a compelling case for several adjustments that will boost your profit and, as a result, the value of your business. You will need to be ready to defend your case for each adjustment so the buyer clearly understands how profitable the business will be when they acquire it.
Some common adjustments are rent (applies if you own the building your company operates from and your company is paying higher-than-market rent), start-up costs, one-off lawsuits or insurance claims, and one-time professional services fees.
So remember, while your multiple is important, it isn’t the only number that matters. The subtle art of adjusting your SDE/EBITDA will give you the opportunity to put significantly more money in your pocket when you sell your business.