NXT: Let’s say I wanted to sell my business – what are buyers looking for?
No matter what industry you’re in, buyers are most concerned with these 3 value drivers: cash flow, scalability, and risk.
Ideally, the business should be profitable and the cashflow relatively predictable (otherwise, you can’t invest for growth). There are actually industry benchmarks that you don’t want your cashflow margin to fall below, or it will signal that your business has some sort of weakness and they will have to dig deeper to get a better understanding of what’s going on.
For scalability, buyers look at the maturity and stability of your management team, infrastructure, and vendor relationships. They want a robust operation that can grow without getting strained. Otherwise, they will have to factor in the cost and time it will take to upgrade your infrastructure, and that will hurt your value.
As for risk, they try to assess if there are any financial, market, or regulatory headaches that might keep them up at night. A red flag here would be if the seller really pushes to get all cash up front. Buyers will often try to put at least some seller financing in place, which means that you don’t take out all the money upfront. It makes it easier for the buyer to finance the deal, but also signals that you believe in your company.
NXT: So how should I be looking at valuing my business?
When you work with a business broker, they will come up with a value that’s called the Most Probable Selling Price (MPSP), and this is based on market data and is adjusted for your company’s cashflow, scalability, and risk mentioned above. The broker team will crunch your financials and come up with a multiple, typically applied to sales or cashflow.
NXT: What’s an average multiple for a B2B business, and what are the most common parameters that justify a discount or a premium valuation?
Quick rule of thumb: For businesses with sales less than $1mm, it’s around 2x the Seller’s Discretionary Earnings from the business. The multiple can be increased or decreased depending on the various value drivers of the business. Businesses with more than $1mm in sales will need a more in depth valuation.
NXT: And what are some ways to increase the value of my business, with a sale in mind over the next say 2-3 years?
Don’t expect to increase the value of your business overnight, but there are ways to get there faster. First, make sure you revenue is trending upwards, since this is the most obvious sign of growth or potential lurking issues.
Next, your financials must be well-organized (income statements, balance sheets, tax returns, etc.) so that buyers will know you’re serious and committed.
And one more thing that often comes as a surprise is employee morale. Buyers will interview employees to make sure they’re a) high-caliber, and b) staying.
It doesn’t hurt to hold off selling until you’re confident that your company is in the best shape that it can be.
NXT: What are some trends you see in B2B transactions?
There is a clear shift towards service-based companies, businesses that don’t have inventory or that are ‘fluid’ and can relocate or move around easily. Buyers are turning away from brick-and-mortar companies.
For example, a company that provides air conditioner repair services in the form of a dispatch truck and a phone number or website can be very flexible and ‘mobile’. Or staffing companies, where you make arrangements, contract temp workers, and deploy employees that meet the demand requests of your customers. No bricks and mortar, no inventory.
NXT: What are some common mistakes that B2B owners make when selling?
There are two factors that can make or break your selling process:
- Lack of preparation, and
- Going to market with the wrong price and terms
If you’re serious about selling your business at some point, you need to do an ‘annual checkup’. Similar to visiting your doctor every year for a physical, business owners should consult brokers to better understand the overall health of their company.
Following the results of the checkup, sit down with your:
- Financial planner to formulate a plan based on the broker’s valuation. Let’s say you would like to retire in 5 years, is this valuation enough to fund your retirement?
- CPA for tax consequences and to understand how much money you would actually get to keep in your own pocket from a sale.
- Attorney to get a legal perspective and review any contracts.
Then, you can consider: “Can I sell now with these financials? Or do I hold on, grow a bit, and sell later?”
But be careful not to go to the market with a price that’s set too high. It will scare off potential buyers, who may think the seller isn’t serious enough. Sure you can adjust your price lower, but by that time a sale may have gone by already. Then again, on the flip side, you don’t want to end up suffering from seller’s remorse. So it’s important to understand your objectives right from the get-go and heed advice from professionals.
NXT: How are you different than other business brokers? Why should someone work with you?
I put my clients first, and not all brokers do that, so find one that fully understands your current situation and has the knowledge and skillset to work on your behalf to find the right buyer for your company.
In my initial consultation with prospective clients, I listen to their story with my undivided attention and I imagine myself in their position and what I would do if it was me looking to sell my business. This assists me to have empathy for their current situation and allows me to advise them on what best for them. Not what’s best for me.
A big thanks to Kyle Griffith at Strategic M&A Advisors for his insights. Kyle has been awarded the Certified Business Intermediary (CBI) from the International Business Broker Association (IBBA). There are less than 500 recipients in the world, and less than 10 in New York. https://kylesellsbusinesses.com/