From time to time I get engaged to help executives negotiate their compensation. These are often...
Get the most for your business when you sell
The M&A activity in professional services firms has followed other industries: it’s increasing, even post-pandemic. Many owners I speak to are interested in selling their businesses, either to start anew or to prepare for retirement. Often they’re unpleasantly surprised at the offers they receive. In this article, I would like to share some pointers that can substantially increase the value of your business.
More than revenue
Undoubtedly, revenue is the largest contributor to valuation of your business. It’s the most direct indicator of how capable your firm is of making sales. But the examination doesn’t stop there; M&A firms and business brokers will take a closer look under the surface to understand the true worth of your business.
EBITDA, which stands for Earnings Before Interest, Depreciation, and Amortization is the industry standard for assessing profitability. Most consultancies I work with don’t accumulate significant interest, depreciation, or amortization, so EBITDA usually closely reflects earnings. Nevertheless, if your business is significantly affected by any of these factors, expect it to have a material impact on your selling price.
Once the top-line and bottom-line revenues are measured, it's time to examine how your business operates. Buyers seek evidence that internal processes are followed, particularly in areas such as budgets, strategy, and decision-making. They want to ensure that the business is not solely reliant on the seller's gut instinct and experience (since those may no longer be present after the sale). Buyers look for businesses that adhere to their processes, allowing department heads to make decisions rather than simply following the owner's orders. They want to see key performance indicators (KPIs) documented and agreed upon, budgets being adhered to, and meetings being recorded. While it's not necessary to have an extensive history, having 12-24 months of documentation can go a long way in proving that the business can thrive without the owner's presence.
It's important to avoid mixing personal assets, such as cars and real estate, into the business. Buyers typically prefer businesses without these assets and are willing to pay more for them. Create a plan to transfer these assets to a separate LLC or liquidate them independently.
Additionally, it is advisable to have someone other than your regular bookkeeper or tax preparer review your financials. This will provide reassurance that your books are in order and give you an opportunity to rectify any irregularities. In turn, this will expedite the due diligence process.
Let Me Help
If you are preparing to sell your firm, I encourage you to reach out to me. I have established relationships with M&A advisors and business brokers. It's worth mentioning that I do not receive any referral fees, ensuring that my recommendations to you remain unbiased. I am the best person to assist you in preparing your business to achieve the highest possible value when the time comes to sell.