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MEDIA - PRESS COVERAGE |
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Top Business Myths Continued
SOURCE: Green Bay Press Gazette, March 9, 2008
In my last column, I introduced three of the top stumbling blocks to selling a business: representing yourself, ignoring market trends, and testing the waters with a tentative sale. If you are considering a sale, get started on the right foot by avoiding these additional misconceptions:
Myth #4: I Know What It is Worth
According to a study from M&A Today, approximately 65 percent of business owners do not know the true value of their businesses. When I speak to owners, they sometimes derive a value based on what they NEED to retire. Others have suggested they should get $100,000/year for "sweat equity."
Other sellers get closer by using industry multiples. These are general market trends that show one type of industry generally sells for five-times EBITDA while another often sells for three times EBITDA.
Using multiples is an inferior method of valuation. It’s akin to managing your finances just by checking the account balance—it doesn’t take history, future growth, staff quality, market conditions or endless other items into account.
For one company we sold, the industry multiple for a service company with little assets should have been three time EBITDA. It ended up selling at a multiple of 33. In another example, the industry multiple was five, but because our client had declining sales trends, it sold for 3.25.
A third party valuation is a good idea for any serious seller. It includes an analysis of the business and the market it operates in. This will give you an understanding of your company’s growth potential, not some vague industry average.
Myth #5: It’s Like Selling a House
When you decide to sell your home, you spend a couple of weeks organizing. You put it on the market and tell everyone. On closing day, you hand over the keys and walk away.
Selling your company is a process, not an event. A successful sale requires a good deal of pre-planning. We recommend owners start preparing two to three years in advance by driving sales, developing key staff, documenting operations, and controlling expenses.
The national average for a home sale is 110 days while the national average for a business sale is nine to 12 months. We’ve completed the process in as little as 60 days and as much as three years, and I can tell you a business is like a home in one regard—the longer it sits on the market the lower the chance of a satisfactory sale.
Even after a sale is finalized, sellers can expect to put in at least a few months if not years of transition time, helping to make the new owner a success.
Sound sale strategies will bring you the optimum price the market will bear. Go to market with realistic expectations by getting a professional valuation and using an M&A Advisor who does not list an asking price. Talk with your advisor about post-sale transition options and remember to stay fully engaged in your business throughout the sale process.
Scott Bushkie is President of Cornerstone Business Services, a lower-middle-market M&A firm with offices throughout the upper Midwest. Reach him by telephone at (920) 436-9890 or by e-mail at sbushkie@cornerstone-business.com.
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