By: Dr. John Sherrill – CBI Tulsa, Oklahoma Business Broker
Last time we discussed the need to begin exit planning early and, since most businesses sell for a multiple of earnings, to find ways to maximize revenues and minimize expenses/deductions. Remember, it is better to pay an effective tax rate of 35% on reported earnings than to lose the opportunity to gain 2-3 times those earnings in sale price.
Today, let’s look at some ways to increase the multiple of earnings that will be applied to determine the sale price. Businesses sell somewhere within an established range of multiples (usually 2-3x) which are discovered through research of comparable sales regionally and across the country. So, what are some things you can do to help your business earn a higher multiple?
Smart investors are always wary of the risks involved in a purchase. One of the biggest risks is whether revenues will continue at established levels. Some questions to ask yourself: Is my revenue recurring or non-recurring? Is cash flow steady or variable? To what degree is revenue dependent on me as the key owner or on a small number of key customers? Are there supply chain issues? What capital expenditures are currently needed or will be required of a new owner in the future? Are my employees capable, content, and likely to stay even if I am not here?
MAXIMIZE THE MULTIPLE
Find ways to diversify and/or stabilize your revenue stream. Help your business be less dependent on you or just a few key employees. Upgrade equipment, technology, and processes. Assure good records and accounting reports. Work on your brand and reputation. Develop better and broader relationships with suppliers and customers. Focus on employee retention and building your team. Now is not the time to “rest on your laurels!”
Dr. John Sherrill