Selling a Business Value | Maximize It's Sale Price

Selling a Business Value | Maximize It’s Sale Price

August 14, 2014 by Andrew Rogerson in Business Valuation

Every business owner wants to get the maximum selling a business value when selling a business. Additionally, the steps to sell a business are many and complicated but when a business owner decides they want to sell, the starting point is a business valuation.

Part of the purpose of the valuation is to normalize the performance of the business over the last three or four years so potential buyers can see trends and decide this is a business of interest to them. My process is also to approach third-party lenders who typically approve SBA loans to get their take that this is a business they would have an interest in approving an SBA loan.

To put the valuation together the necessary documents are the tax returns for the last 3 or 4 years, a current profit and loss statement, and a current Balance Sheet. See the documents needed when selling your business.

I recently asked a CPA and a Certified Appraiser why tax returns were the main documents used to determine the value of a business. The two reasons I was given are that tax returns are documents the business owner submits to the IRS; which is a Federal government agency. As a result, by law, a third-party lender can request a copy of the document from the IRS as long as they have the permission of the business owner. This therefore provides the lender with some protection that the document they are using to assess the performance of the business is true and correct. The second reason for using the tax returns is that the business owner signs it. Right above where it is signed, there is a clause that comes with an acknowledgment that starts with “Under penalties of perjury…” It is therefore expected the signor or business owner is aware of the accuracy of the tax return as they have no legal defense that they didn’t realize the tax return was not accurate.

The fact that tax returns are the basis of a business valuation is really important to the seller. At the end of the day, the purpose of the tax return is to report the annual sales and expenses to the IRS and pay as little tax as possible. When a business owner wants to sell their business, their goal is the exact opposite, that is, to get the highest valuation possible and therefore the highest price from selling their business.

With this in mind, a qualified business appraiser as part of their valuation process will normalize the performance of the business by recasting the financial statements.

Financial Recast

Recasting simply means obtaining the SDE or Sellers Discretionary Earnings of the business by adjusting certain items to reflect reality. These items include:

Owner salaries including payments to family members.
Any nonrecurring expenses.
Interest payments.
Depreciation expenses.
Rent expense.
Owner discretionary expenses including owner bonuses and pensions.
Any known increases in fixed expenses.

The recasting process arrives at a much better representation of the business and helps the buyer if they choose to get third-party finance.

It is also proper to recast the balance sheet. The balance sheet shown on a tax return is generally not even close to accurate. For example, a balance sheet on a tax return shows the depreciation value of fixtures, furniture, and equipment as well as buildings if the seller owns the building. Another figure that is generally way wrong is inventory as few owners have the time or inclination to get it accurate.

If you are thinking of selling your business and it’s in the next few years, start making an Excel file spreadsheet with any one-off expenses you may incur as these are legitimate add-backs that need to be taken into account when valuing or selling your business.

Privately held businesses have a unique position in the business world. The only time a business owner has any interest in knowing the true value of their business is when they plan to sell. Otherwise, nobody needs to know and there are too many other things to do with your time when you own a business.

Understand EBITDA Multiples by Industry

Understanding EBITDA multiples in your industry isn’t just a nice-to-have; it’s a must-have in your business sale toolkit. Whether you’re in healthcare, commercial property, technology, manufacturing, or any other sector with businesses boasting annual revenue of $500k and above in California, these multiples play a pivotal role in driving the success of your sale.

By diving into the nuances of your industry’s EBITDA multiples, partnering with experienced professionals, and strategically leveraging this knowledge, you can position your business for a lucrative sale, setting the stage for a fulfilling retirement.

If you’re ready to embark on this exciting journey, armed with the wisdom of EBITDA multiples, I’m here to guide you every step of the way. Your business sale adventure begins now!

There are many different ways to value a company. The key is to use the right method for your specific situation.

If you’re a business owner looking to sell your company, you should use more than one of the valuation methods to determine your company’s worth before putting it up for sale.

If you need help with determining your company’s worth, schedule a free consultation with Andrew Rogerson. He can help you determine the best way to value your company and maximize its value.

Do you have any questions about how to value a company? Leave a comment below and we’ll be happy to help!

Final Note

Using the best valuation formula to determine your biggest asset’s worth, as well as the decision to exit business ownership, is a significant life event. There could be plenty of emotions involved.

When you collaborate with a business brokerage firm in California, it will provide all the solutions and insights toward getting the most out of the business sale.

There are only a few ways to sell and value a business quickly in California, and an experienced business broker like Andrew Rogerson can guide you through the best strategy.

It is currently the perfect storm to value and sell your business in California. With the great resignation that started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.

With a certified business intermediary at your side, we feel confident that you will sell your business in California quickly and at the highest price.

Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com services the whole state of California.

Go to the next article: Part of business valuation to answer What’s my business worth series ->

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Selling a Business Value | Maximize It’s Sale Price