Opinion: Think about your company’s value before selling

At some point, you will transition your company.

When you are ready to move on, what would be important to you? Creating wealth? Funding your retirement? Building a family legacy? Simplifying your lifestyle? Offering opportunity to loyal and capable employees?

Money helps, no matter what those goals are. Your profitable, systematic business can create money for you in two ways: 1. By generating profits and cash through day-to-day operations. 2. By enabling you to sell the company for the promise of future profits and cash.

That promise of immediate, additional profits and cash is compelling to a buyer. The highest value – selling price – is found when your company demonstrates, via your financial reports, the ability to consistently and predictably create sales, profits and cash. Your selling price gets even higher if you have some heft (multiple millions in sales) and the company runs without the owner’s daily involvement.

So, what kind of money are we talking about? There are many ways to value a company. Here are some basics.

Earnings approach
You may have heard of EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. Earnings is another word for profits.

This valuation method takes your earnings and adds back the noncash expenses and expenses that may change dramatically when the company is restructured. This calculation is usually done using a few years’ worth of data.

Next, those profits are applied to a multiplier. Essentially, the buyer is looking for an amount of earnings that he can count on and exceed over a period of time.

Multipliers range from one to 10, or more, and have everything to do with strength of the business and the level of interest by the buyer. Note that this method is generally used for companies with multiple millions in sales and solid operating systems.

Asset approach
This refers to selling all or part of the assets of your company.

Even if you don’t have a lot in profitability, you may have valuable real estate or a just-right building. You may have large, well maintained equipment. You can sell your business in pieces to different buyers if that helps maximize your selling price. You could sell the business assets and keep the real estate or building and create rental income.

Nontangible assets can be valuable, too. Do you have top placement on Google and other internet platforms? Data that confirms those ads is uber-important, because results deliver results.

How many calls do you get every day? Calls equals sales opportunities. A buyer will spend 10% or more on marketing, and you may craft a deal that pays you instead.

Maximum options
So, what’s required to maximize your options when it comes to selling your business?

Do you have a business plan? Regular business retreats are a good practice to adopt.

There are tax implications with every sale, and the tax strategy can make the construction of the deal as important as the selling price.

You deserve a mountain of gold for the time, energy and resources you have put into your business. However, like real estate, it’s only worth what someone will pay for it.

Now, my disclaimer: I’m not a lawyer, so don’t hold this information to any legal standards. This is strictly one woman’s observations and thoughts. I have been involved in or privy to dozens of acquisitions and no two have been the same. I am just scratching the surface here, to help you get a feel for possibilities. My intention with this column is to get you interested enough to learn more about the topic.

Happy selling.

Ellen Rohr is an author and business consultant offering profit-building tips, trending business blogs and online workshops at EllenRohr.com. Her books include “Where Did the Money Go?” and “The Bare Bones Weekend Biz Plan.” She can be reached at ellen@ellenrohr.com.